UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DCD.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June 30, 2022~~March 31, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number: 001-38924

UpHealth, Inc.

(Exact Name of Registrant as Specified in its Charter)


Delaware		83-3838045
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
14000 S. Military Trail,	Suite 203	33484
Delray Beach,	Florida
(Address of principal executive offices)		(Zip Code)

~~(312) 618-1322~~(888) 424-3646

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

~~UPH.BC~~UPH

New York Stock Exchange

Redeemable Warrants, exercisable for one share of Common Stock at an exercise price of ~~$11.50~~$115.00 per share

~~UPH.WS.BC~~UPH.WS

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~August 14, 2022,~~May 10, 2023, the registrant had ~~147,215,675~~16,784,476 shares of common stock, $0.0001 par value per share, outstanding.

TABLE OF CONTENTS


			Page

Part I - Financial Information			34
Item 1. Financial Statements			34
Condensed Consolidated Balance Sheets			45
Condensed Consolidated Statements of Operations			56
Condensed Consolidated Statements of Comprehensive Loss			67
Condensed Consolidated Statements of Stockholders’ Equity			78
Condensed Consolidated Statements of Cash Flows			89
Notes to Condensed Consolidated Financial Statements			910
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3. Quantitative and Qualitative Disclosures About Market Risk			4441
Item 4. Controls and Procedures			4441

Part II - Other Information			4642
Item 1. Legal Proceedings			4642
Item 1A. Risk Factors			4642
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			5045
Item 3. Defaults Upon Senior Securities			5045
Item 4. Mine Safety Disclosures			5045
Item 5. Other Information			5045
Item 6. Exhibits			5146
Signatures			5249

Part 1 - Financial Information

Item 1. Financial Statements

UPHEALTH, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, unaudited)


		June 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
ASSETS	ASSETS					ASSETS
Current Assets:	Current Assets:					Current Assets:
Cash and cash equivalents	Cash and cash equivalents	$	40,629	$	58,192	Cash and cash equivalents	$	13,333	$	15,557
Restricted cash		508		18,609
Accounts receivable, net	Accounts receivable, net	28,658		22,761		Accounts receivable, net	24,432		21,851
Inventories	Inventories	2,966		2,928		Inventories	134		161
Due from related parties	Due from related parties	31		40		Due from related parties	—		14
Prepaid expenses and other current assets	Prepaid expenses and other current assets	3,785		4,217		Prepaid expenses and other current assets	3,263		2,991
Assets held for sale, current						Assets held for sale, current	3,178		2,748
Total current assets	Total current assets	76,577		106,747		Total current assets	44,340		43,322
Property and equipment, net	Property and equipment, net	46,126		56,072		Property and equipment, net	14,324		14,069
Operating lease right-of-use assets						Operating lease right-of-use assets	6,644		7,213
Intangible assets, net	Intangible assets, net	110,563		115,313		Intangible assets, net	30,216		31,362
Goodwill	Goodwill	284,177		284,268		Goodwill	159,675		159,675
Equity investment						Equity investment	21,200		21,200
Other assets	Other assets	2,768		6,907		Other assets	474		438
Assets held for sale, noncurrent						Assets held for sale, noncurrent	61,924		62,525
Total assets	Total assets	$	520,211	$	569,307	Total assets	$	338,797	$	339,804
LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY					LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:	Current Liabilities:					Current Liabilities:
Accounts payable	Accounts payable	$	18,160	$	13,604	Accounts payable	$	17,261	$	17,983
Accrued expenses	Accrued expenses	40,065		36,084		Accrued expenses	41,099		38,763
Deferred revenue	Deferred revenue	6,452		2,649		Deferred revenue	1,549		2,738
Due to related party	Due to related party	458		47		Due to related party	166		229
Income taxes payable	Income taxes payable	2,731		739		Income taxes payable	367		388
Related-party long-term debt, current		466		657
Long-term debt, current		18,827		22,093
Forward share purchase liability		—		18,051
Other current liabilities		3,069		2,780
Related-party debt, current						Related-party debt, current	200		—
Lease liabilities, current						Lease liabilities, current	5,317		5,475
Other liabilities, current						Other liabilities, current	433		74
Liabilities held for sale, current						Liabilities held for sale, current	2,975		3,319
Total current liabilities	Total current liabilities	90,228		96,704		Total current liabilities	69,367		68,969
Related-party long-term debt, noncurrent		336		331
Long-term debt, noncurrent		105,243		98,417
Related-party debt, noncurrent						Related-party debt, noncurrent	31		281
Debt, noncurrent						Debt, noncurrent	148,621		145,962
Deferred tax liabilities	Deferred tax liabilities	19,181		28,281		Deferred tax liabilities	1,203		1,200
Derivative liability, noncurrent						Derivative liability, noncurrent	30		56
Warrant liabilities, noncurrent	Warrant liabilities, noncurrent	61		252		Warrant liabilities, noncurrent	17		9
Derivative liability, noncurrent		1,307		7,977
Other long-term liabilities		2,971		3,502
Lease liabilities, noncurrent						Lease liabilities, noncurrent	8,050		8,741
Other liabilities, noncurrent						Other liabilities, noncurrent	201		662
Liabilities held for sale, noncurrent						Liabilities held for sale, noncurrent	7,678		7,787
Total liabilities	Total liabilities	219,327		235,464		Total liabilities	235,198		233,667
Commitments and Contingencies (Note 11)		0		0
Commitments and Contingencies (Note 16)						Commitments and Contingencies (Note 16)
Stockholders’ Equity:	Stockholders’ Equity:					Stockholders’ Equity:
Common stock	Common stock	15		14		Common stock	2		2
Additional paid-in capital	Additional paid-in capital	683,697		665,461		Additional paid-in capital	693,496		688,355
Treasury stock, at cost	Treasury stock, at cost	(17,000)		—		Treasury stock, at cost	(17,000)		(17,000)
Accumulated deficit	Accumulated deficit	(373,092)		(343,209)		Accumulated deficit	(574,292)		(566,209)
Accumulated other comprehensive loss		(7,659)		(3,802)
Total UpHealth, Inc., stockholders’ equity	Total UpHealth, Inc., stockholders’ equity	285,961		318,464		Total UpHealth, Inc., stockholders’ equity	102,206		105,148
Noncontrolling interests	Noncontrolling interests	14,923		15,379		Noncontrolling interests	1,393		989
Total stockholders’ equity	Total stockholders’ equity	300,884		333,843		Total stockholders’ equity	103,599		106,137
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	520,211	$	569,307	Total liabilities and stockholders’ equity	$	338,797	$	339,804

The accompanying notes are an integral part of these condensed consolidated financial statements.

UPHEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts, unaudited)


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended March 31,
		2022		2021		2022		2021			2023		2022
Revenue:
Revenues:										Revenues:
Services	Services	$	28,096	$	15,448	$	53,782	$	23,586	Services	$	30,941	$	25,686
Licenses and subscriptions	Licenses and subscriptions	6,812		9,145		8,593		12,803		Licenses and subscriptions	1,936		1,781
Products	Products	8,760		7,289		17,265		8,309		Products	9,268		8,505
Total revenue		43,668		31,882		79,640		44,698
Cost of goods and services:
Total revenues										Total revenues	42,145		35,972
Costs of revenues:										Costs of revenues:
Services	Services	14,762		9,590		29,207		14,063		Services	13,744		15,758
License and subscriptions	License and subscriptions	217		6,173		450		6,670		License and subscriptions	319		233
Products	Products	6,296		4,727		12,286		5,643		Products	5,406		5,990
Total cost of goods and services		21,275		20,490		41,943		26,376
Gross margin		22,393		11,392		37,697		18,322
Total costs of revenues										Total costs of revenues	19,469		21,981
Gross profit										Gross profit	22,676		13,991
Operating expenses:	Operating expenses:									Operating expenses:
Sales and marketing	Sales and marketing	3,486		1,695		6,212		2,580		Sales and marketing	4,619		3,434
Research and development	Research and development	1,782		2,273		3,369		3,843		Research and development	1,285		1,758
General and administrative	General and administrative	14,632		7,306		28,291		11,029		General and administrative	11,009		11,467
Depreciation and amortization	Depreciation and amortization	4,700		2,966		9,936		3,870		Depreciation and amortization	1,611		5,236
Stock-based compensation	Stock-based compensation	1,088		—		2,462		—		Stock-based compensation	989		1,374
Lease abandonment expenses	Lease abandonment expenses	—		—		75		—		Lease abandonment expenses	—		75
Goodwill and intangible asset impairment	Goodwill and intangible asset impairment	—		—		6,174		—		Goodwill and intangible asset impairment	495		6,174
Acquisition, integration, and transformation costs	Acquisition, integration, and transformation costs	6,749		32,653		9,133		35,339		Acquisition, integration, and transformation costs	3,446		2,384
Total operating expenses	Total operating expenses	32,437		46,893		65,652		56,661		Total operating expenses	23,454		31,902
Loss from operations	Loss from operations	(10,044)		(35,501)		(27,955)		(38,339)		Loss from operations	(778)		(17,911)
Other income (expense):
Other expense:										Other expense:
Interest expense	Interest expense	(6,603)		(4,904)		(13,598)		(5,615)		Interest expense	(6,858)		(6,995)
Gain on consolidation of equity method investment		—		—		—		640
Gain on fair value of derivative liability	Gain on fair value of derivative liability	1,841		—		6,670		—		Gain on fair value of derivative liability	26		4,829
Gain on fair value of warrant liabilities		95		1,075		190		1,075
Gain on extinguishment of debt		—		151		—		151
Other income (expense), net, including interest income		14		(256)		(2)		(219)
Gain (loss) on fair value of warrant liabilities										Gain (loss) on fair value of warrant liabilities	(8)		95
Other expense, net, including interest income										Other expense, net, including interest income	(17)		(16)
Total other expense	Total other expense	(4,653)		(3,934)		(6,740)		(3,968)		Total other expense	(6,857)		(2,087)
Loss before income tax benefit	Loss before income tax benefit	(14,697)		(39,435)		(34,695)		(42,307)		Loss before income tax benefit	(7,635)		(19,998)
Income tax benefit	Income tax benefit	2,232		6,646		4,525		7,052		Income tax benefit	—		2,293
Net loss before loss from equity method investment		(12,465)		(32,789)		(30,170)		(35,255)
Loss from equity method investment		—		—		—		(561)
Net loss	Net loss	(12,465)		(32,789)		(30,170)		(35,816)		Net loss	(7,635)		(17,705)
Less: net loss attributable to noncontrolling interests		(27)		(6)		(287)		(84)
Less: net income (loss) attributable to noncontrolling interests										Less: net income (loss) attributable to noncontrolling interests	448		(260)
Net loss attributable to UpHealth, Inc.	Net loss attributable to UpHealth, Inc.	$	(12,438)	$	(32,783)	$	(29,883)	$	(35,732)	Net loss attributable to UpHealth, Inc.	$	(8,083)	$	(17,445)
Net loss per share attributable to UpHealth, Inc.:	Net loss per share attributable to UpHealth, Inc.:									Net loss per share attributable to UpHealth, Inc.:
Basic		$	(0.09)	$	(0.35)	$	(0.21)	$	(0.43)
Diluted		$	(0.09)	$	(0.35)	$	(0.21)	$	(0.43)
Weighted average shares outstanding:
Basic		144,624		94,170		144,581		83,585
Diluted		144,624		94,170		144,581		83,585
Basic and diluted										Basic and diluted	$	(0.51)	$	(1.21)
Weighted average shares outstanding:(1)										Weighted average shares outstanding:(1)
Basic and diluted										Basic and diluted	15,730		14,454

(1)Amounts as of March 31, 2022 and before that date differ from those published in our prior condensed consolidated financial statements as they were retrospectively adjusted as a result of the Reverse Stock Split (as described below in Note 1, Organization and Business). Specifically, the number of common shares outstanding during periods before the Reverse Stock Split are divided by the exchange ratio of 10:1, such that each ten shares of common stock were combined and reconstituted into one share of common stock effective December 8, 2022.

The accompanying notes are an integral part of these condensed consolidated financial statements.

UPHEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands, unaudited)


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended March 31,
		2022		2021		2022		2021			2023		2022
Net loss	Net loss	$	(12,465)	$	(32,789)	$	(30,170)	$	(35,816)	Net loss	$	(7,635)	$	(17,705)
Foreign currency translation adjustments, net of tax	Foreign currency translation adjustments, net of tax	(2,480)		(2,319)		(3,857)		(3,478)		Foreign currency translation adjustments, net of tax	—		(1,377)
Comprehensive loss	Comprehensive loss	(14,945)		(35,108)		(34,027)		(39,294)		Comprehensive loss	(7,635)		(19,082)
Less: comprehensive loss attributable to noncontrolling interests		(27)		(6)		(287)		(84)
Comprehensive income (loss) attributable to noncontrolling interests										Comprehensive income (loss) attributable to noncontrolling interests	448		(260)
Comprehensive loss attributable to UpHealth, Inc.	Comprehensive loss attributable to UpHealth, Inc.	$	(14,918)	$	(35,102)	$	(33,740)	$	(39,210)	Comprehensive loss attributable to UpHealth, Inc.	$	(8,083)	$	(18,822)

The accompanying notes are an integral part of these condensed consolidated financial statements.

UPHEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, unaudited)

Common Stock Treasury Stock
Shares Amount Additional
Paid-In
Capital Shares Amount Accumulated
Deficit Accumulated Other
Comprehensive
Loss Total UpHealth, Inc.
Stockholders’
Equity Noncontrolling
Interests Total
Stockholders’
Equity
Balance at December 31, 2021 144,279 $ 14 $ 665,461 — $ — $ (343,209) $ (3,802) $ 318,464 $ 15,379 $ 333,843
Equity award activity, net of shares withheld for taxes 372 — (67) — — — — (67) — (67)
Stock-based compensation — — 1,374 — — — — 1,374 — 1,374
Net loss — — — — — (17,445) — (17,445) (260) (17,705)
Foreign currency translation adjustments — — — — — — (1,377) (1,377) (1,377)
Balance at March 31, 2022 144,651 $ 14 $ 666,768 — $ — $ (360,654) $ (5,179) $ 300,949 $ 15,119 $ 316,068
Equity award activity, net of shares withheld for taxes 3,901 1 (1,159) — — — — (1,158) — (1,158)
Stock-based compensation — — 1,088 — — — — 1,088 — 1,088
Common stock repurchased in connection with forward share purchase agreement (1,700) — 17,000 1,700 (17,000) — — — — —
Distribution to noncontrolling interests — — — — — — — — (139) (139)
Purchase of noncontrolling interest — — — — — — — — (30) (30)
Net loss — — — — — (12,438) — (12,438) (27) (12,465)
Foreign currency translation adjustments — — — — — — (2,480) (2,480) — (2,480)
Balance at Balance at June 30, 2022 146,852 $ 15 $ 683,697 1,700 $ (17,000) $ (373,092) $ (7,659) $ 285,961 $ 14,923 $ 300,884
Common Stock Treasury Stock
Shares Amount Additional
Paid-In
Capital Shares Amount Accumulated
Deficit Accumulated Other
Comprehensive
Loss Total UpHealth, Inc.
Stockholders’
Equity Noncontrolling
Interests Total
Stockholders’
Equity
Balance at December 31, 2020(1)
70,021 $ 7 $ 222,900 — $ — $ (2,186) $ — $ 220,721 $ — $ 220,721
Issuance of common stock to consummate business combinations(1)
8,749 1 87,408 — — — — 87,409 17,389 104,798
Net loss — — — — — (2,949) — (2,949) (78) (3,027)
Foreign currency translation adjustments — — — — — — (1,159) (1,159) — (1,159)
Balance at March 31, 2021(1)
78,771 $ 8 $ 310,308 — $ — $ (5,135) $ (1,159) $ 304,022 $ 17,311 $ 321,333
Issuance of common stock to consummate business combinations 26,162 3 243,584 — — — — 243,587 (2,239) 241,348
Merger recapitalization 9,471 1 54,604 — — — — 54,605 — 54,605
PIPE common stock issuance 3,000 — 27,079 — — — — 27,079 — 27,079
Forward share repurchase agreement — — (17,000) — — — — (17,000) — (17,000)
Issuance of common stock for debt conversion 200 — 1,879 — — — — 1,879 — 1,879
Net loss — — — — — (32,783) — (32,783) (6) (32,789)
Foreign currency translation adjustments — — — — — — (2,319) (2,319) — (2,319)
Balance at June 30, 2021(1)
117,605 $ 12 $ 620,455 — $ — $ (37,918) $ (3,478) $ 579,071 $ 15,066 $ 594,137


	Common Stock					Treasury Stock
	Shares	Amount		Additional Paid-In Capital		Shares	Amount		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total UpHealth, Inc. Stockholders’ Equity		Noncontrolling Interests		Total Stockholders’ Equity
Balance as of January 1, 2023	15,054	$	2	$	688,355	170	$	(17,000)	$	(566,209)	$	—	$	105,148	$	989	$	106,137
Equity award activity, net of shares withheld for taxes	80	—		(3)		—	—		—		—		(3)		—		(3)
Issuance of common stock in connection with 2023 private placement, net of issuance costs of $348	1,650	—		4,155		—	—		—		—		4,155		—		4,155
Stock-based compensation	—	—		989		—	—		—		—		989		—		989
Net income (loss)	—	—		—		—	—		(8,083)		—		(8,083)		448		(7,635)
Distribution to noncontrolling interests	—	—		—		—	—		—		—		—		(44)		(44)
Balance as of March 31, 2023	16,784	$	2	$	693,496	170	$	(17,000)	$	(574,292)	$	—	$	102,206	$	1,393	$	103,599


	Common Stock					Treasury Stock
	Shares	Amount		Additional Paid-In Capital		Shares	Amount		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total UpHealth, Inc. Stockholders’ Equity		Noncontrolling Interests		Total Stockholders’ Equity
Balance as of January 1, 2022(1)	14,428	$	1	$	665,474	—	$	—	$	(343,209)	$	(3,802)	$	318,464	$	15,379	$	333,843
Equity award activity, net of shares withheld for taxes(1)	37	—		(68)		—	—		—		—		(68)		—		(68)
Stock-based compensation	—	—		1,374		—	—		—		—		1,374		—		1,374
Net loss	—	—		—		—	—		(17,445)		—		(17,445)		(260)		(17,705)
Foreign currency translation adjustments	—	—		—		—	—		—		(1,377)		(1,377)		—		(1,377)
Balance as of March 31, 2022(1)	14,465	$	1	$	666,780	—	$	—	$	(360,654)	$	(5,179)	$	300,948	$	15,119	$	316,067

(1)Amounts as of March 31, ~~2021~~2022 and before that date differ from those published in our prior condensed consolidated financial statements as they were retrospectively adjusted as a result of the ~~accounting for the Business Combinations~~Reverse Stock Split (as ~~defined~~described below in Note 1, Organization and Business). Specifically, the number of common shares outstanding during periods before the ~~Business Combinations~~Reverse Stock Split are ~~computed on the basis of the number of common shares of UpHealth Holdings (accounting acquiror) during those periods multiplied~~divided by the exchange ratio ~~established in the~~of 10:1, such that each ten shares of common stock ~~purchase agreement (1.00 UpHealth Holdings shares converted to 10.28 GigCapital2 shares). Common~~were combined and reconstituted into one share of common stock ~~and additional paid-in capital were adjusted accordingly.~~effective December 8, 2022.

The accompanying notes are an integral part of these condensed consolidated financial statements.

UPHEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

Six Months Ended June 30,
2022 2021
Operating activities:
Net loss $ (30,170) $ (35,816)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 12,725 4,353
Amortization of debt issuance costs and discount on convertible debt 6,969 1,913
Stock-based compensation 2,462 —
Provision for bad debt expense (37) —
Impairment of property, plant and equipment, intangible assets and goodwill 5,459 —
Gain on extinguishment of debt — (151)
Loss from equity method investment — 561
Gain on consolidation of equity method investment — (640)
Gain on fair value of warrant liabilities (190) (1,075)
Gain on fair value of derivative liability (6,670) —
Loss on disposal of property and equipment — 78
Deferred income taxes (4,596) (7,262)
Other — (271)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable (6,151) (21,000)
Inventories (55) (80)
Prepaid expenses and other current assets 540 5
Accounts payable and accrued expenses 7,913 15,573
Income taxes payable 264 200
Deferred revenue 3,838 5,877
Proceeds from Provider Relief Funds — 506
Due to related parties 170 28
Other current liabilities (312) (27)
Net cash used in operating activities (7,841) (37,228)
Investing activities:
Purchases of property and equipment (3,783) (669)
Due to related parties — 265
Net cash acquired in acquisition of businesses — 4,263
Net cash (used in) provided by investing activities (3,783) 3,859
Financing activities:
Proceeds from merger and recapitalization transaction — 83,435
Proceeds from convertible debt — 164,500
Repayments of debt (3,234) (17,333)
Payments of debt issuance costs — (8,100)
Repayment of forward share purchase (18,521) —
Repayments of seller notes — (88,056)
Payments of capital lease obligations (1,619) (275)
Payments for taxes related to net settlement of equity awards (67) —
Distribution to noncontrolling interest (139) (100)
Payments of amount due to member — (4,270)
Net cash (used in) provided by financing activities (23,580) 129,801
Effect of exchange rate changes on cash, cash equivalents, and restricted cash (460) (99)
Net (decrease) increase in cash, cash equivalents, and restricted cash (35,664) 96,333
Cash, cash equivalents, and restricted cash, beginning of period 76,801 2,369
Cash, cash equivalents, and restricted cash, end of period $ 41,137 $ 98,702
Supplemental cash flow information:
Cash paid for interest $ 5,269 $ 233
Cash paid for income taxes $ 521 $ —
Non-cash investing and financing activity:
Property, plant and equipment reclassed from other assets $ 3,751 $ —
Property and equipment acquired through capital lease and vendor financing arrangements $ 1,628 $ —
FIN 48 liability reclassed from deferred tax liabilities $ 1,750 $ —
Unremitted taxes related to net settlement of equity awards $ 1,158 0
Issuance of common stock for debt conversion $ — $ 1,879
Issuance of common stock and promissory note to consummate TTC business combination $ — $ 43,306
Issuance of common stock and promissory note to consummate Glocal business combination $ — $ 110,421
Issuance of common stock and promissory note to consummate Innovations Group business combination $ — $ 160,378
Issuance of common stock and promissory note to consummate Cloudbreak business combination $ — $ 106,284
Reconciliation of cash, cash equivalents, and restricted cash:
Cash and cash equivalents $ 40,629 $ 98,116
Restricted cash 508 586
Total cash, cash equivalents, and restricted cash $ 41,137 $ 98,702


	Three Months Ended March 31,
	2023		2022
Operating activities:
Net loss	$	(7,635)	$	(17,705)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	2,412		6,605
Amortization of debt issuance costs and discount on convertible debt	2,659		3,485
Stock-based compensation	989		1,374
Impairment of property and equipment, intangible assets and goodwill	495		5,459
Provision for credit losses	(122)		(342)
Loss (gain) on fair value of warrant liabilities	8		(95)
Gain on fair value of derivative liability	(26)		(4,829)
Deferred income taxes	—		(2,262)
Amortization of operating lease right-of-use assets	559		—
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable	(2,456)		3,472
Inventories	26		(161)
Prepaid expenses and other current assets	(632)		(577)
Accounts payable and accrued expenses	1,611		3,067
Operating lease liabilities	(587)		—
Income taxes payable	(19)		317
Deferred revenue	(1,188)		(907)
Due to related parties	(49)		62
Other current liabilities	(84)		(34)
Net cash used in operating activities	(4,039)		(3,071)
Investing activities:
Purchases of property and equipment	(1,341)		(1,663)
Net cash used in investing activities	(1,341)		(1,663)
Financing activities:
Proceeds from 2023 private placement, net of issuance costs of $348	4,152		—
Repayments of debt	—		(151)
Payments of finance and capital lease obligations	(899)		(800)
Net tax withholdings from share-based compensation	(3)		(68)
Payments of amounts due to members	(50)		—
Distribution to noncontrolling interest	(44)		—
Net cash provided by (used in) provided by financing activities	3,156		(1,019)
Effect of exchange rate changes on cash and cash equivalents	—		(394)
Net decrease in cash and cash equivalents	(2,224)		(6,147)
Cash and cash equivalents, beginning of period	15,557		76,801
Cash and cash equivalents, end of period	$	13,333	$	70,654

Supplemental cash flow information:
Cash paid for interest	$	2,283	$	235
Cash paid for income taxes	$	19	$	521
Non-cash investing and financing activity:
Property and equipment reclassified from other assets	$	—	$	3,833
Property and equipment acquired through capital lease and vendor financing arrangements	$	179	$	1,628
FIN 48 liability reclassified from deferred tax liabilities	$	—	$	1,750
Reconciliation of cash and cash equivalents and restricted cash:
Cash and cash equivalents	$	13,333	$	52,036
Restricted cash	—		18,618
Total cash and cash equivalents and restricted cash	$	13,333	$	70,654

The accompanying notes are an integral part of these financial statements.

UPHEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in dollars, unaudited)

1.Organization and Business

UpHealth, Inc. (“UpHealth,,” “we,“we,” “us,“us,” “~~our~~,“our,” “~~UpHealth,~~“UpHealth,” or the “~~Company~~”“Company”) is the parent company of both UpHealth Holdings, Inc. (“UpHealth ~~Holdings~~”Holdings”) and Cloudbreak Health, LLC (“~~Cloudbreak~~”Cloudbreak”).

GigCapital2, Inc. (“~~GigCapital2~~”GigCapital2”), the Company’s predecessor, was incorporated in Delaware on March 6, 2019. GigCapital2 was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. The Company’s business combinations (the “~~BusinessCombinations~~”“Business Combinations”) were consummated on June 9, 2021, and in connection with the ~~business combinations,~~Business Combinations, GigCapital2 changed its corporate name to ~~“UpHealth,~~UpHealth, Inc.”

~~Our public units began trading~~Deconsolidation of Glocal

As a result of events which occurred during the three months ended September 30, 2022, we determined that a reconsideration event occurred in July 2022, which required us to reassess whether Glocal Healthcare Systems Private Limited (“Glocal”) was a Variable Interest Entity (“VIE”) and whether we continued to have a controlling financial interest in Glocal. Based on this assessment, we concluded that Glocal was a VIE, and furthermore, that we no longer have the ~~NYSE under~~ability to direct any activities of Glocal and no longer have a controlling financial interest. As a result, effective July 2022, we deconsolidated Glocal and recorded a $37.7 million loss on deconsolidation of equity investment in our unaudited condensed consolidated statements of operations, measured as the ~~symbol “GIX.U” on June 5, 2019. On June 26, 2019,~~difference between the probability-weighted fair value of Glocal of $21.2 million and the carrying amount of Glocal’s assets and liabilities as of July 1, 2022. The probability-weighted fair value of Glocal, which is included in equity investment in our unaudited condensed consolidated balance sheets, incorporated scenarios where control of Glocal was gained and Glocal would continue as a going concern, control of Glocal was gained and Glocal would need to be liquidated, and control of Glocal was not gained and the equity investment in Glocal would be worthless. Further, we ~~announced that~~assessed the ~~holders~~prospective accounting for our equity investment in Glocal. Since we no longer had the ability to exercise significant influence over operating and financial policies of Glocal, we concluded the investment should be accounted for utilizing the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 321, Investments - Equity Securities (“ASC 321”) measurement alternative, whereby the investment was measured at cost and will continue to be evaluated for any indicators of impairment. In addition, we derecognized $14.3 million of noncontrolling interests related to Glocal. If through legal processes we are able to obtain the ability to direct the activities of Glocal, and it is our intent to exercise all legal rights and remedies to achieve such a result, then we will further reassess the appropriate accounting treatment of our ~~units may elect~~investment in Glocal.

The financial results of Glocal for the three months ended March 31, 2022 are included in our unaudited condensed consolidated financial statements, and the financial position of Glocal as of March 31, 2023 and December 31, 2022 and the financial results of Glocal for the three months ended March 31, 2023 are not included in our unaudited condensed consolidated financial statements. The only transactions between us and Glocal subsequent to ~~separately trade the securities underlying such units. On~~ July 1, ~~2019,~~2022 was the ~~shares, warrants,~~transfer by us during the three months ended September 30, 2022 of $5.1 million to a designated “Share Account” maintained with a leading bank in India in the name of Glocal for which our Chief Financial Officer is the sole authorized signatory.

Reverse Stock Split

On December 5, 2022 our stockholders approved an amendment to our Second Amended and ~~rights began trading on the NYSE under the symbols “GIX”, “GIX.WS,” and “GIX.RT,” respectively. On June 9, 2021, upon the completion~~Restated Certificate of Incorporation (the “Certificate of Amendment”) to effect a reverse split of the ~~Business Combinations,~~outstanding shares of our ~~units separated into their underlying~~common stock, par value $0.0001 per share, at a specific ratio within a range of 4:1 to 10:1, with the specific ratio to be fixed within this range by our board of directors in its sole discretion without further stockholder approval (the “Reverse Stock Split”). Our board of directors fixed the Reverse Stock Split ratio at 10:1, such that each ten shares of common stock ~~warrants,~~were combined and ~~rights (and the rights were converted~~reconstituted into ~~shares~~one share of common ~~stock). Our units~~stock effective December 8, 2022. Except as noted, all share, stock option, restricted stock unit (“RSU”), and ~~rights ceased~~per share information throughout this Quarterly Report on Form 10-Q (this “Quarterly Report”) has been retroactively adjusted to ~~trade,~~reflect this Reverse Stock Split.

Sale of Innovations Group

On February 26, 2023, we agreed to sell 100% of the outstanding capital stock of our wholly owned subsidiary, Innovations Group, Inc. (“Innovations Group”), to Belmar MidCo, Inc., a Delaware corporation and ~~our common~~a wholly owned subsidiary of Belmar Holdings, Inc., a Delaware corporation, a portfolio company of Webster Capital IV, L.P., a Delaware limited partnership, pursuant to a stock purchase agreement dated February 26, 2023. The sale closed on May 11, 2023 for gross proceeds of $56.0 million, subject to working capital, closing debt, and ~~warrants now trade under the symbols “UPH.BC”~~other adjustments. See Note 3, Assets and ~~“UPH.WS.BC,” respectively.~~Liabilities Held for Sale, for further information.

2.Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

~~The~~Our accompanying unaudited condensed consolidated financial statements ~~of UpHealth~~ have been prepared in accordance with U.S. generally accepted accounting principles (“~~GAAP~~”U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission ~~(the “SEC~~”(“SEC”) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. ~~The~~Our unaudited condensed consolidated financial statements, including the condensed notes thereto, are unaudited and exclude some of the disclosures required in audited financial statements. ~~The~~Our condensed consolidated balance ~~sheets~~sheet as of December 31, ~~2021 have~~2022 has been derived from our audited consolidated financial statements as of that date, but ~~does~~do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

In the opinion of management, ~~the~~our accompanying unaudited condensed consolidated financial statements contain all adjustments and eliminations, consisting only of normal recurring adjustments necessary for a fair presentation in conformity with U.S. GAAP. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 or any future period. Our accompanying unaudited condensed consolidated financial statements should be read in conjunction with ~~the~~our audited consolidated financial statements for the year ended December 31, ~~2021.~~2022.

~~The~~Our unaudited condensed consolidated financial statements include the accounts of UpHealth and its consolidated subsidiaries. As described in Note 1, Organization and Business, our Glocal subsidiary was deconsolidated effective July 2022.

All intercompany balances and transactions have been eliminated in consolidation.

~~Certain amounts included in the prior quarter’s condensed consolidated financial statements have been reclassified to conform to the current quarter’s presentation.~~

Use of Estimates

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts in the unaudited condensed consolidated financial statements and accompanying notes thereto.

Significant estimates and assumptions made by management include the determination of:

•The identification and reporting of variable interest entities (“VIEs”). We consolidate VIEs when we have variable interests and are the primary beneficiary. We continually evaluate our involvement with VIEs to determine when these criteria are met.

•The valuation of equity investments, including our determination of the fair value of Glocal;

•The valuation of assets acquired and liabilities assumed for business combinations, including intangible assets and goodwill;

•The estimated economic lives and recoverability of intangible assets;

•The valuations prepared in connection with the review of goodwill, intangible assets, and other long-lived assets for impairment:

•The timing and amount of ~~revenue~~revenues to be recognized, including standalone selling price (“~~SSP~~”SSP”) of performance obligations for revenue contracts with multiple performance obligations;

•The identification of and provision for uncollectible accounts receivable;

•The capitalization and useful life of internal-use software development costs;

•The valuation of ~~assets acquired and liabilities assumed for business combinations, including intangible assets and goodwill;~~

•~~The estimated economic lives and recoverability of intangible assets;~~

•~~The valuation of~~ derivatives and warrants; and

•The recognition, measurement, and valuation of current and deferred income taxes and uncertain tax positions.

Actual results could differ materially from those estimates. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the result of which forms the basis for making judgments about the carrying values of assets and liabilities.

Allowance for Expected Credit Losses

We closely monitor our accounts receivable balances and estimate the allowance for expected credit losses. The estimate is primarily based on historical collection experience and other factors, including those related to current market conditions and events. Credit losses associated with accounts receivable have not been material historically.

Equity Investment

As discussed in Deconsolidation of Equity Investment in Note 1, Organization and Business, as of March 31, 2023 and December 31, 2022, we held an interest in the privately-held equity securities of Glocal in which we did not have a controlling interest and were unable to exercise significant influence. Based on the terms of these privately-held securities, we concluded the investment should be accounted for utilizing the Accounting Standards Codification (“ASC”) 321 measurement alternative, whereby the investment was measured at cost and will continue to be evaluated for any indicators of impairment.

Held for Sale

Assets and liabilities to be disposed of by sale (“disposal groups”) are reclassified into assets and liabilities held for sale on our consolidated balance sheets. The reclassification occurs when an agreement to sell exists, or management has committed to a plan to sell the assets within one year. Disposal groups are measured at the lower of carrying value or fair value less costs to sell and are not depreciated or amortized. When the net realizable value of a disposal group increases during a period, a gain can be recognized to the extent that it does not increase the value of the disposal group beyond its original carrying value when the disposal group was reclassified as held for sale. The fair value of a disposal group, less any costs to sell, is assessed each reporting period it remains classified as held for sale and any remeasurement to the lower of carrying value or fair value less costs to sell is reported as an adjustment to the carrying value of the disposal group.

New Accounting Pronouncements Not Yet Adopted

In ~~May 2021,~~August 2020, the FASB issued Accounting Standards Update (“~~ASU~~”ASU”) ~~2021-04,~~ Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. This ASU provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses: (1) how an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchang~~e. We adopted the amended guidance effective January 1, 2022. The adoption of this standard did not have a material impact on the condensed consolidated financial statements.~~

~~In August 2020, the FASB issued ASU~~ 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU simplifies the accounting for convertible instruments by eliminating the conversion option separation model for convertible debt that can be settled in cash and by eliminating the measurement model for beneficial conversion features. Convertible instruments that continue to be subject to separation models are (1) those with conversion options that are required to be accounted for as bifurcated derivatives and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. This ASU also requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of share settlement for instruments that may be settled in cash or shares, except for certain liability-classified share-based payment awards. This ASU will be effective for us on January 1, 2024. Early adoption is permitted, but no earlier than the fiscal year beginning on January 1, 2021, including interim periods within that fiscal year. We are currently evaluating the effect of the adoption of this ASU will have on our unaudited condensed consolidated financial statements.

~~In December 2019, the FASB issued ASU 2019-12,~~ ~~Income Taxes (Topic 740): Simplifying the~~Recently Adopted Accounting ~~for Income Taxes~~. This ASU removes specific exceptions to the general principles in Topic 740. It eliminates the need for an organization to analyze whether the following apply in a given period: (1) exception to the incremental approach for intraperiod tax allocation, (2) exceptions to accounting for basis differences when there are ownership changes in foreign investments, and (3) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. This ASU also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for franchise taxes that are partially based on income, transactions with a government that result in a step up in the tax basis of goodwill, separate financial statements of legal entities that are not subject to tax, and enacted changes in tax laws in interim periods. This ASU will be effective for us for fiscal year beginning January 1, 2022, and to interim periods within the fiscal year beginning on January 1, 2023, with early adoption permitted. We are currently evaluating the effect the adoption of this ASU will have on our condensed consolidated financial statements.

~~In February 2016, the FASB issued ASU 2016-02,~~ ~~Leases (Topic 842), and subsequently issued several supplemental/clarifying ASUs (collectively, “ASC 842~~”). Among other things, under this ASU, lessees will be required to recognize, at commencement date, a lease liability representing the lessee’s obligation to make lease payments arising from the lease and a right-of-use asset representing the lessee’s right to use or control the use of a specified asset for the lease term for leases greater than 12 months. Under the new guidance, lessor accounting is largely unchanged. This ASU will be effective for us for the fiscal year beginning on January 1, 2022, and the interim periods within the fiscal year beginning on January 1, 2023, using the modified retrospective approach. We anticipate that most of our operating leases will result inthe recognition of additional assets and the corresponding liabilities on our condensed consolidated balance sheets. The actual impact will depend on our lease portfolio at the time of adoption. We continue to assess all implications of the standard and related financial disclosures.Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequently issued several supplemental/clarifying ASUs (collectively, “~~ASC 326~~”“ASC 326”). This ASU requires entities to estimate a lifetime expected credit loss for most financial assets, including trade and other receivables, other long-term financings including available for sale and held-to-maturity debt securities, and loans. Subsequently, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which amended the scope of ASC 326 and clarified that receivables arising from operating leases are not within the scope of the standard and should continue to be accounted for in accordance with ASC 842. This ASU ~~will be~~was effective for us on January 1, ~~2023. We are currently evaluating the effect~~2023, and the adoption ~~of this ASU will~~did not have a material effect on our condensed consolidated financial statements.

Reclassifications

3.~~Business Combinations~~

~~Measurement Period~~

WeCertain prior period amounts have included a measurement period table for each acquisition, identifying the line item or line items where an adjustment was deemed necessary and have quantified its impact. We finalized the valuations and completed the purchase price allocations for Thrasys, BHS, TTC, and Innovations Group during the three months ended December 31, 2021. We finalized the valuation and completed the purchase price allocation for Glocal during the three months ended March 31, 2022, and finalized the valuation and completed the purchase price allocation for Cloudbreak during the three months ended June 30, 2022.

~~Acquisition of TTC~~

~~The following table sets forth the allocation of the purchase price~~been reclassified to TTC’s identifiable tangible and intangible assets acquired and liabilities assumed, including measurement period adjustments. The allocation of value in this table is complete, as the measurement period ended as of January 25, 2022.

(In thousands) As of June 30, 2022 Measurement
Period
Adjustments As of January 25, 2021
Accounts receivable $ 1,311 $ (462) $ 1,773
Prepaid expenses and other 187 — 187
Identifiable intangible assets 1,125 — 1,125
Property and equipment 531 — 531
Other assets 281 — 281
Goodwill 58,354 780 57,574
Total assets acquired 61,789 318 61,471
Accounts payable 625 — 625
Accrued expenses and other current liabilities 602 — 602
Due to related parties 4,200 2,807 1,393
Debt 11,216 (1,284) 12,500
Deferred tax liabilities 446 (28) 474
Total liabilities assumed 17,089 1,495 15,594
Net assets acquired $ 44,700 $ (1,177) $ 45,877

TTC submitted a request for forgiveness of its PPP loans in 2020 and they were forgiven in full and TTC was legally released from repaying the loans in the amount of $0.9 million and $0.3 million in February and March 2021, respectively. The forgiveness was recorded as a decrease in debt and goodwill during the three months ended March 31, 2021. In connection with the closing of the Business Combinations on June 9, 2021, the purchase consideration was adjusted in accordance with the merger agreements, resulting in a net decrease in net assets acquired and goodwill of $1.2 million. During the three months ended June 30, 2021, TTC recorded an accrual in the amount of $2.8 million for amounts owing to a related party as of the acquisition date, with an offsetting increase in goodwill. During the three months ended December 31, 2021, a $0.5 million accounts receivable reserve was recorded as a decrease in accounts receivable and an increase in goodwill.

~~The acquired intangible assets from TTC and their related estimated useful lives consisted of the following:~~

Approximate
Fair Value Estimated
Useful Life
(In thousands) (in years)
Definite-life intangible assets – Trade names $ 1,125 3
Total fair value of identifiable intangible assets $ 1,125

~~Acquisition of Glocal~~

The following table sets forth the allocation of the purchase price to Glocal's identifiable tangible and intangible assets acquired and liabilities assumed, including measurement period adjustments. The allocation of value in this table is complete, as the measurement period ended as of March 26, 2022.

(In thousands) As of June 30, 2022 Measurement Period Adjustments As of March 26, 2021
Accounts receivable, net $ 1,350 $ (5,111) $ 6,461
Inventories 325 — 325
Identifiable intangible assets 45,289 7,250 38,039
Property, equipment, and work in progress 26,767 (13,959) 40,726
Other current assets, including short term advances 15 (1,965) 1,980
Other noncurrent assets, including long term advances 509 — 509
Goodwill 121,913 30,042 91,871
Total assets acquired 196,168 16,257 179,911
Accounts payable 579 — 579
Accrued expenses and other current liabilities 9,692 1,421 8,271
Income tax liability 2,420 2,420 —
Deferred tax liability 8,649 8,649 —
Debt 19,937 (2,275) 22,212
Noncontrolling interest 29,278 11,889 17,389
Total liabilities assumed and noncontrolling interest 70,555 22,104 48,451
Net assets acquired $ 125,613 $ (5,847) $ 131,460

In connection with the closing of the Business Combinations on June 9, 2021, the purchase consideration was adjusted in accordance with the merger agreements, resulting in a net decrease in net assets acquired and goodwill of $5.8 million during the three months ended June 30, 2021. During the three months ended June 30, 2021, Glocal recorded a deferred tax liability in the amount of $9.9 million relating to identifiable intangible and other assets acquired in connection with the acquisition, with an offsetting increase in goodwill. During the three months ended September 30, 2021, Glocal recorded a reserve against its accounts receivable in the amount of $2.0 million and a liability related to redeemable preferred shares as of the acquisition date in the amount of $11.9 million, with offsetting increases in goodwill. During the three months ended December 31, 2021, Glocal recorded reserves against accounts receivable and other assets in the amount of $5.1 million and additions to accrued expenses for unrecorded liabilities in the amount of $1.2 million, with an offsetting increase to goodwill. During the three months ended December 31, 2021, Glocal recorded debt forgiveness in the amount of $2.3 million, with an offsetting decrease to goodwill, as well as a deferred tax liability in the amount of $2.6 million relating to income tax liabilities and other assets acquired in connection with the acquisition, with an offsetting increase in goodwill. During the three months ended March 31, 2022, Glocal recorded a reduction in the fair value of property, equipment, and work in progress in the amount of $15.6 million, an increase in the value of intangible assets in the amount of $7.3 million, and an increase in accrued expenses related to unrecorded liabilities in the amount of $0.2 million, with offsetting increases to goodwill, as well as a reductionconform to the ~~deferred tax liability in the amount of $2.6 million related to these adjustments, with an offsetting decrease in goodwill.~~

~~The acquired intangible assets from Glocal and their related estimated useful lives consisted of the following:~~

Approximate
Fair Value Estimated
Useful Life
(In thousands) (in years)
Definite-lived intangible assets—Technology and intellectual property $ 45,289 7
Total fair value of identifiable intangible assets $ 45,289

~~Acquisition of Innovations Group~~

The following table sets forth the allocation of the purchase price to Innovation’s identifiable tangible and intangible assets acquired and liabilities assumed. The allocation of value in this table is complete,current year presentation as ~~the measurement period ended as of April 27, 2022.~~shown below:

(In thousands) As of June 30, 2022 Measurement Period Adjustments As of April 27, 2021
Accounts receivable $ 47 $ — $ 47
Inventories 2,693 — 2,693
Prepaid expenses and other 530 — 530
Identifiable intangible assets 29,115 790 28,325
Property and equipment 3,642 (4,295) 7,937
Other assets — (22) 22
Goodwill 143,654 (76) 143,730
Total assets acquired 179,681 (3,603) 183,284
Accounts payable 472 — 472
Accrued expenses and other current liabilities 772 (8) 780
Deferred revenue 302 — 302
Deferred tax liability 8,017 180 7,837
Debt — (4,069) 4,069
Noncontrolling interests — — —
Total liabilities assumed and noncontrolling interest 9,563 (3,897) 13,460
Net assets acquired $ 170,118 $ 294 $ 169,824


	Three Months Ended March 31, 2022
	As Reported		Reclassifications		As Adjusted
Revenues:
Services	$	25,686	$	—	$	25,686
Licenses and subscriptions	1,781		—		1,781
Products	8,505		—		8,505
Total revenues	35,972		—		35,972
Costs of revenues:
Services	14,445		1,313		15,758
License and subscriptions	233		—		233
Products	5,990		—		5,990
Total costs of revenues	20,668		1,313		21,981
Gross profit	15,304		(1,313)		13,991
Operating expenses:
Sales and marketing	2,726		708		3,434
Research and development	1,587		171		1,758
General and administrative	13,659		(2,192)		11,467
Depreciation and amortization	5,236		—		5,236
Stock-based compensation	1,374		—		1,374
Lease abandonment expenses	75		—		75
Goodwill and intangible asset impairment	6,174		—		6,174
Acquisition, integration, and transformation costs	2,384		—		2,384
Total operating expenses	33,215		(1,313)		31,902
Loss from operations	(17,911)		—		(17,911)
Other expense:
Interest expense	(6,995)		—		(6,995)
Gain on fair value of derivative liability	4,829		—		4,829
Gain on fair value of warrant liabilities	95		—		95
Other expense, net, including interest income	(16)		—		(16)
Total other expense	(2,087)		—		(2,087)
Loss before income tax benefit	(19,998)		—		(19,998)
Income tax benefit	2,293		—		2,293
Net loss	(17,705)		—		(17,705)
Less: net loss attributable to noncontrolling interests	(260)		—		(260)
Net loss attributable to UpHealth, Inc.	$	(17,445)	$	—	$	(17,445)

~~During~~

3. Assets and Liabilities Held for Sale

On February 26, 2023, we entered into an agreement to sell Innovations Group, one of our subsidiaries within our Services segment. The transaction closed on May 11, 2023. In connection with entering into this agreement, we concluded that the disposal group met the held for sale criteria and classified the assets and liabilities as held for sale as of March 31, 2023.

In connection with the held for sale classification, we recorded a total loss of $0.5 million in the three months ended ~~September 30, 2021, Innovations Group recorded noncontrolling interests related to a VIE as of the acquisition date~~March 31, 2023 and $1.8 million in ~~the amount of $0.5 million, with an offsetting increase in goodwill. During~~ the three months ended December 31, ~~2021, Innovations Group determined that~~2022 on the ~~VIE should not be consolidated since it no longer had a variable interest~~remeasurement of the disposal group to its fair value, less cost to sell, which was recorded in goodwill and intangible asset impairment in the ~~VIE,~~condensed consolidated statements of operations.

Total assets and ~~recorded a $4.3 million decrease to property~~liabilities of the disposal group held for sale on the March 31, 2023 and equipment, a $22 thousand decrease to other assets, an $8 thousand decrease to accrued expenses and other current liabilities and a $4.1 million decrease to debt, with no change to goodwill. In addition, during the three months ended December 31, 2021, Innovations Group recorded a lease intangible of $0.8 million, with an offsetting decrease in goodwill, as well as a $0.2 million increase in deferred tax liability related to income tax liabilities and other assets acquired in connection with the acquisition, with an offsetting increase in goodwill.

~~The acquired intangible assets from Innovations Group and their related estimated useful lives~~2022 condensed consolidated balance sheets consisted of the following:

Approximate
Fair Value Estimated
Useful Life
(In thousands) (in years)
Definite-lived intangible assets—Trade names $ 10,925 10
Definite-lived intangible assets—Technology and intellectual property 8,075 5 - 7
Definite-lived intangible assets—Customer relationships 9,325 10
Definite-lived intangible assets—Lease $ 790 4.8
Total fair value of identifiable intangible assets $ 29,115

~~Acquisition of Cloudbreak~~

The following table sets forth the allocation of the purchase price to Cloudbreak’s identifiable tangible and intangible assets acquired and liabilities assumed. The allocation of value in this table is complete, as the measurement period ended as of June 9, 2022.

(In thousands) As of June 30, 2022 Measurement Period Adjustments As of June 9, 2021
Accounts receivable $ 5,551 $ 741 $ 4,810
Prepaid expenses and other 921 — 921
Identifiable intangible assets 32,475 — 32,475
Property and equipment 7,065 183 6,882
Other assets 631 (411) 1,042
Goodwill 107,219 (3,749) 110,968
Total assets acquired 153,862 (3,236) 157,098
Accounts payable 2,518 — 2,518
Accrued expenses and other current liabilities 1,267 362 905
Deferred revenue 15 — 15
Deferred tax liability 3,912 (3,994) 7,906
Other long-term liabilities 382 382 —
Debt 3,752 — 3,752
Total liabilities assumed 11,846 (3,250) 15,096
Net assets acquired $ 142,016 $ 14 $ 142,002


	March 31, 2023		December 31, 2022
Accounts receivable, net	$	117	$	78
Inventories	2,425		2,058
Prepaid expenses and other current assets	636		612
Property and equipment, net	4,602		4,602
Operating lease right-of-use assets	1,193		1,298
Intangible assets, net	23,063		23,063
Goodwill	33,561		35,353
Less: Impairment	(495)		(1,791)
Total assets held for sale	$	65,102	$	65,273

Accounts payable	$	978	$	1,104
Accrued expenses	1,329		1,544
Deferred revenue	234		242
Lease liabilities, current	434		429
Deferred tax liabilities	6,918		6,918
Lease liabilities, noncurrent	760		869
Total liabilities held for sale	$	10,653	$	11,106

~~During~~

4. Revenues

As discussed in Note 1, Organization and Business, we deconsolidated Glocal during the three months ended September 30, ~~2021,~~2022; accordingly, the ~~purchase consideration was adjusted in accordance with the merger agreements, resulting in a net increase in net assets acquired and goodwill~~financial results of ~~$14 thousand. During~~Glocal for the three months ended ~~September 30, 2021, Cloudbreak recorded a lease liability related to its operating leases as~~March 31, 2022 are included in our unaudited condensed consolidated financial statements, and the financial results of ~~the acquisition date in the amount of $0.4 million, with an offsetting increase in goodwill. During~~Glocal for the three months ended ~~December~~March 31, 2021, Cloudbreak recorded a $0.7 million increase to accounts receivable, net of reserve, with an offsetting decrease in goodwill; a $0.2 million increase to property and equipment and a $0.4 million decrease in other assets, with an offsetting increase in goodwill, related to capital lease security deposits; a $0.4 million increase to accrued expenses and other current liabilities, with an offsetting increase to goodwill, related to a payroll accrual and a payable to a customer; and a $3.9 million decrease in deferred tax liability related to income tax liabilities and other assets acquired in connection with the acquisition, with an offsetting increase in goodwill. During the three months ended June 30, 2022, Cloudbreak recorded a $0.1 million decrease in deferred tax liability related to income tax liabilities and other assets acquired in connection with the acquisition, with an offsetting decrease in goodwill.

~~The acquired intangible assets from Cloudbreak and their related estimated useful lives consisted of the following:~~

Approximate
Fair Value Estimated
Useful Life
(In thousands) (in years)
Definite-lived intangible assets—Trade names $ 12,975 10
Definite-lived intangible assets—Technology and intellectual property 5,825 5
Definite-lived intangible assets—Customer relationships 13,675 10
Total fair value of identifiable intangible assets $ 32,475

~~Acquisition, Integration and Transformation Costs~~

For the three and six months ended June 30, 2022, we incurred $6.7 million and $9.1 million, respectively, of acquisition, integration, and transformation costs for the acquisitions of UpHealth Holdings and its subsidiaries (Thrasys, BHS, TTC, Glocal, and Innovations Group), and Cloudbreak, which2023 are not included in ~~the~~our unaudited condensed consolidated statements of operations. For the three and six months ended June 30, 2021, we incurred $32.7 million and $35.3 million, respectively, of acquisition, integration, and transformation costs for the acquisitions of UpHealth Holdings and its subsidiaries (Thrasys, BHS, TTC, Glocal, and Innovations Group), and Cloudbreak, which are included in the condensed consolidated statements of operations.

~~Combined Pro Forma Results for the Three and Six Months Ended June 30, 2021~~

~~The results of operations of UpHealth Holdings and its subsidiaries (BHS, Thrasys, TTC, Glocal, and Innovations Group) and Cloudbreak have been included in the~~ financial statements subsequent to their acquisition dates. The following unaudited pro forma consolidated financial information reflects the results of operations as if the acquisition of UpHealth Holdings (including all subsidiaries) and Cloudbreak had occurred on January 1, 2021, after giving effect to certain purchase accounting adjustments. These purchase accounting adjustments mainly include incremental depreciation expense related to the fair value adjustment of property and

equipment, amortization expense related to identifiable intangible assets, and tax expense related to the combined tax provisions. This information does not purport to be indicative of the actual results that would have occurred if the acquisition had actually been completed on the date indicated, nor is it necessarily indicative of the future operating results or the financial position of the combined company:

Three Months Ended June 30, Six Months Ended
June 30,
(In thousands) 2021 2021
Pro Forma
Revenues $ 39,171 $ 69,778
Net income (loss) $ (37,052) $ (43,627)
Basic earnings per share $ (0.39) $ (0.52)
Diluted earnings per share $ (0.39) $ (0.52)

statements.

~~4. Revenue~~

~~Revenue~~Revenues by geography consisted of the following:


		Three Months Ended June 30,				Six Months Ended June 30,					Three months ended March 31,
(In thousands)	(In thousands)	2022		2021		2022		2021		(In thousands)	2023		2022
Americas	Americas	$	40,073	$	20,126	$	72,736	$	29,352	Americas	$	42,145	$	32,663
Europe		—		7,800		—		10,800
Asia	Asia	3,595		3,956		6,904		4,546		Asia	—		3,309
Total revenue		$	43,668	$	31,882	$	79,640	$	44,698
Total revenues										Total revenues	$	42,145	$	35,972

Our ~~revenue is~~revenues are entirely derived from the healthcare industry. ~~Revenue~~Revenues recognized over-time ~~was~~were approximately ~~68%~~75% and ~~75%~~71% of the total ~~revenue~~revenues during three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021, respectively. Revenue recognized over-time was approximately 71% and 73% of total revenue during the six months ended June 30, 2022 and 2021,~~ respectively.

Contract Assets

There were no impairments of contract assets, consisting of unbilled receivables, during the three ~~and six~~ months ended ~~June 30, 2022~~March 31, 2023 and ~~2021.~~2022.

The change in contract assets was as follows:


		Six Months Ended June 30,					Three Months Ended March 31,
(In thousands)	(In thousands)	2022		2021		(In thousands)	2023		2022
Unbilled receivables, beginning of period	Unbilled receivables, beginning of period	$	784	$	3,536	Unbilled receivables, beginning of period	$	694	$	784
Reclassifications to billed receivables	Reclassifications to billed receivables	(232)		(1,192)		Reclassifications to billed receivables	(694)		(232)
Revenues recognized in excess of period billings	Revenues recognized in excess of period billings	417		9,783		Revenues recognized in excess of period billings	668		285
Unbilled receivables, end of period	Unbilled receivables, end of period	$	969	$	12,127	Unbilled receivables, end of period	$	668	$	837

Contract Liabilities

The change in contract liabilities, consisting of deferred revenue, was as follows:

Six Months Ended June 30,
(In thousands) 2022 2021
Deferred revenue, beginning of period $ 2,649 $ 397
Revenues recognized from balances held at the beginning of the period (1,998) (397)
Net revenues deferred from period collections on unfulfilled performance obligations 5,801 6,572
Ending balance $ 6,452 $ 6,572

1514

~~Revenue~~


	Three Months Ended March 31,
(In thousands)	2023		2022
Deferred revenue, beginning of period	$	2,738	$	2,649
Revenues recognized from balances held at the beginning of the period	(1,442)		(1,581)
Revenues deferred from period collections on unfulfilled performance obligations	253		664
Deferred revenue, end of period	$	1,549	$	1,732

Revenues recognized ratably over time isare generally billed in advance and includes ~~SaaS~~software-as-a-service (“SaaS”) internet hosting, subscriptions, construction of digital hospitals and dispensaries, and related consulting, implementation, services support, and advisory services.

~~Revenue~~Revenues recognized as delivered over time ~~includes~~include professional services billed on a time and materials basis, and fixed fee professional services and training classes that are primarily billed, delivered, and recognized within the same reporting period.

Approximately ~~1.0% and 2.5%~~3.4% of ~~revenue~~revenues recognized during the three ~~and six~~ months ended ~~June 30, 2022, respectively,~~March 31, 2023, was from the deferred revenue balance existing as of December 31, ~~2021.~~2022. Approximately ~~0.6% and 0.9%~~4% of ~~revenue~~revenues recognized during the three ~~and six~~ months ended ~~June 30, 2021, respectively,~~March 31, 2022, was from the deferred revenue balance existing as of December 31, ~~2020.~~2021.

Remaining Performance Obligations

~~The Company's remaining performance obligation is expected to be recognized evenly over the next 36 months and is shown in the table below.~~

Remaining performance obligations consisted of the following ~~at June 30, 2022:~~as of March 31, 2023:


(In thousands)	(In thousands)	Total		Remaining 2022	2023 - 2024	(In thousands)	Remaining 2023		2024		Total
Subscriptions	Subscriptions	$	9,518	3,727	5,791	Subscriptions	$	2,919	$	1,104	$	4,023
Program management and professional services	Program management and professional services	5,555		2,812	2,743	Program management and professional services	2,092		—		2,092
Total	Total	$	15,073	6,539	8,534	Total	$	5,011	$	1,104	$	6,115

5. Supplemental Financial Statement Information

As discussed in Note 1, Organization and Business, we deconsolidated Glocal during the three months ended September 30, 2022; accordingly, the financial results of Glocal for the three months ended March 31, 2022 are included in our unaudited condensed consolidated financial statements, and the financial position of Glocal as of March 31, 2023 and December 31, 2022 and the financial results of Glocal for the three months ended March 31, 2023 are not included in our unaudited condensed consolidated financial statements.

Property and equipment consisted of the following:


(In thousands)	(In thousands)	June 30, 2022		December 31, 2021		(In thousands)	March 31, 2023		December 31, 2022
Land		$	4,817	$	15,459
Buildings		15,197		18,086
Leasehold improvements	Leasehold improvements	3,620		3,393		Leasehold improvements	$	878	$	868
Medical and surgical equipment		2,414		2,953
Electrical and other equipment	Electrical and other equipment	408		508		Electrical and other equipment	21		21
Computer equipment, furniture and fixtures	Computer equipment, furniture and fixtures	13,735		12,029		Computer equipment, furniture and fixtures	16,413		16,222
Vehicles	Vehicles	305		185		Vehicles	305		302
Internal use software		5,562		3,837
Construction in progress		8,044		4,363
Capitalized software development costs						Capitalized software development costs	6,925		4,404
Capitalized software development costs in progress						Capitalized software development costs in progress	849		2,590
		54,102		60,813			25,391		24,407
Accumulated depreciation and amortization	Accumulated depreciation and amortization	(7,976)		(4,741)		Accumulated depreciation and amortization	(11,067)		(10,338)
Total property and equipment, net	Total property and equipment, net	$	46,126	$	56,072	Total property and equipment, net	$	14,324	$	14,069

As discussed in Note 4, Assets and Liabilities Held for Sale, an additional $4.6 million of property and equipment are included in assets held for sale, noncurrent, in the condensed consolidated balance sheet as of both March 31, 2023 and December 31, 2022.

Depreciation expense was ~~$1.8~~$1.3 million and ~~$0.9~~$1.5 million for the three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and $3.2 million and $1.0 million for the six months ended June 30, 2022 and 2021,~~ respectively.

Accrued expenses consisted of the following:

1615


(In thousands)	(In thousands)	June 30, 2022		December 31, 2021		(In thousands)	March 31, 2023		December 31, 2022
Accrued professional fees	Accrued professional fees	$	11,108	$	10,238	Accrued professional fees	$	15,768	$	14,245
Accrued products and licenses	Accrued products and licenses	17,820		17,889		Accrued products and licenses	17,820		17,820
Accrued interest on debt	Accrued interest on debt	2,106		1,227		Accrued interest on debt	2,553		741
Accrued payroll and bonuses	Accrued payroll and bonuses	5,433		3,939		Accrued payroll and bonuses	4,715		5,163
Accrued taxes in connection with shareholder distribution		120		120
Other accruals	Other accruals	3,478		2,671		Other accruals	243		794
Total accrued expenses	Total accrued expenses	$	40,065	$	36,084	Total accrued expenses	$	41,099	$	38,763

As discussed in Note 4, Assets and Liabilities Held for Sale, an additional $1.3 million and $1.5 million of accrued expenses are included in liabilities held for sale, current, in the condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022, respectively.

6. Intangible Assets

The changes in carrying amounts of intangible assets consisted of the following as of ~~June 30, 2022:~~March 31, 2023:

(In thousands) Trade Names Technology and Intellectual Property Customer Relationships Lease Total
December 31, 2021 $ 29,506 $ 54,521 $ 30,612 $ 674 $ 115,313
Additions — 7,250 — — 7,250
Amortization (1,579) (5,949) (1,672) (84) (9,284)
Impairments (680) — — — (680)
Foreign exchange — (2,036) — — (2,036)
June 30, 2022 $ 27,247 $ 53,786 $ 28,940 $ 590 $ 110,563


(In thousands)	Trade Names		Technology and Intellectual Property		Customer Relationships		Total
December 31, 2022	$	11,995	$	5,850	$	13,517	$	31,362
Amortization	(358)		(379)		(409)		(1,146)
March 31, 2023	$	11,637	$	5,471	$	13,108	$	30,216

No impairment charge was recognized during the three months ended ~~June 30, 2022 and an~~March 31, 2023. An impairment charge of $0.7 million was recognized during the ~~six~~three months ended ~~June 30,~~March 31, 2022 ~~at TTC. No impairment charge was recognized during~~in our Services segment.

As discussed in Note 3, Assets and Liabilities Held for Sale, an additional $23.1 million of intangible assets (which includes trade names of $9.1 million, technology and intellectual property of $5.7 million, customer relationships of $7.8 million, and lease assets of $0.5 million) are included in assets held for sale, noncurrent, in the ~~three~~condensed consolidated balance sheets as of March 31, 2023 and ~~six months ended June 30, 2021.~~December 31, 2022.

The estimated useful lives of trade names are 3-10 years, the estimated useful lives of technology and intellectual property are 5-7 years, and the estimated useful life of customer relationships is 10 years.

Amortization expense was ~~$4.2~~$1.1 million and ~~$2.7~~$5.1 million for the three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021, respectively. Amortization expense was $9.3 million and $3.5 million for the six months ended June 30, 2022 and 2021,~~ respectively.

The estimated amortization expense related to definite-lived intangible assets for the five succeeding years is as follows:


(In thousands)	(In thousands)	Trade Name Amortization		Technology and Intellectual Property Amortization		Customer Relationships Amortization		Lease Amortization		Total		(In thousands)	Trade Name Amortization		Technology and Intellectual Property Amortization		Customer Relationships Amortization		Total
Remaining 2022		$	1,672	$	5,120	$	1,641	$	80	$	8,513
2023		2,717		10,273		3,313		165		16,468
Remaining 2023												Remaining 2023	$	1,058	$	1,149	$	1,212	$	3,419
2024	2024	2,650		10,273		3,313		165		16,401		2024	1,416		1,532		1,616		4,564
2025	2025	2,650		10,273		3,313		165		16,401		2025	1,416		1,532		1,616		4,564
2026	2026	2,650		9,622		3,313		15		15,600		2026	1,416		896		1,616		3,928
2027												2027	1,416		362		1,616		3,394
Thereafter	Thereafter	14,908		8,225		14,047		—		37,180		Thereafter	4,915		—		5,432		10,347
		$	27,247	$	53,786	$	28,940	$	590	$	110,563		$	11,637	$	5,471	$	13,108	$	30,216

7. Goodwill

~~We performed a~~As discussed in Note 3, Assets and Liabilities Held for Sale, an additional $33.1 million and $33.6 million of goodwill ~~impairment assessment~~is included in assets held for sale, noncurrent, in the condensed consolidated balance sheets as of March 31, 2023 and December 31, ~~2021, which included both qualitative and quantitative assessments. Our assessment included~~

2022, respectively. In the three months ended March 31, 2023, we recorded a ~~comparison~~$0.5 million impairment charge on the remeasurement of ~~carrying value to an estimated fair value using a market approach based on our market capitalization. Based on this assessment, we concluded~~ the ~~fair value of all 3 segments was below the carrying value primarily due~~Innovations Group disposal group to the ~~recent change~~expected proceeds, less cost to sell, which was included in assets held for sale, noncurrent, in our ~~market valuation~~condensed consolidated balance sheets. See Note 3, Assets and ~~financial performance and recorded a goodwill impairment in the amount of $297.9 million.~~Liabilities Held for Sale, for further information. In the three months ended March 31, 2022, as a result of measurement period adjustments, we increased

goodwill in the amount of $5.5 million, which was immediately impaired. ~~There was no impairment of goodwill during the three months ended June 30, 2022 or during the three and six months ended June 30, 2021.~~

The carrying amount of goodwill consisted of the following:


~~(In thousands)~~	~~Goodwill~~
~~Balance at December 31, 2021~~	$	~~284,268~~
~~Measurement period adjustment~~	~~5,403~~
~~Goodwill and intangible asset impairment~~	~~(5,494)~~
~~Balance at June 30, 2022~~	$	~~284,177~~


(In thousands)	March 31, 2023		December 31, 2022
Goodwill	$	159,675	$	159,675

8. Debt

Debt consisted of the following:


(In thousands)	(In thousands)	June 30, 2022		December 31, 2021		(In thousands)	March 31, 2023		December 31, 2022
Convertible notes		$	160,000	$	160,000
Other debt facilities (various maturities and interest rates)		551		3,847
Provider Relief and EIDL Funds		10		123
Seller notes		18,680		18,680
2025 Notes						2025 Notes	$	67,500	$	67,500
2026 Notes						2026 Notes	115,000		115,000
Total debt	Total debt	179,241		182,650		Total debt	182,500		182,500
Less: unamortized original issue and debt discount	Less: unamortized original issue and debt discount	(55,171)		(62,140)		Less: unamortized original issue and debt discount	(33,879)		(36,538)
Total debt, net of unamortized original issue and debt discount	Total debt, net of unamortized original issue and debt discount	124,070		120,510		Total debt, net of unamortized original issue and debt discount	148,621		145,962
Less: current portion of debt	Less: current portion of debt	(18,827)		(22,093)		Less: current portion of debt	—		—
Noncurrent portion of debt	Noncurrent portion of debt	$	105,243	$	98,417	Noncurrent portion of debt	$	148,621	$	145,962

2026 Unsecured Convertible Notes and Indenture

On January 20, 2021, GigCapital2 entered into convertible note subscription agreements, each dated January 20, 2021 and amended on June 8, 2021, with certain institutional investors, pursuant to which GigCapital2 agreed to issue and sell unsecured convertible notes in a private placement to close immediately prior to the closing of the Business Combinations.

On June 15, 2021, in connection with the closing of the Business Combinations, we entered into an indenture (the “~~Indenture~~”“2026 Indenture”) with Wilmington Trust, National Association, a national banking association, (the “~~Indenture Trustee~~”“Indenture Trustee”) in its capacity as trustee thereunder, in respect of the $160.0 million in aggregate principal amount of unsecured convertible notes due in 2026 (the “~~2026 Notes~~”“2026 Notes”) that were issued to certain institutional investors. The 2026 Notes bear interest at a rate of 6.25% per annum, payable semi-annually, and ~~are~~were convertible following the reverse split of our shares into approximately ~~15,023,475~~1,502,347 shares of common stock at a conversion price of ~~$10.65~~$106.50 in accordance with the terms of the 2026 Indenture, and will mature on June 15, 2026. The total proceeds received from the 2026 Notes were $151.9 million, net of debt issuance costs of $8.1 million. In accounting for the 2026 Notes, we bifurcated and accounted for the conversion option as a derivative measured at fair value on the issuance date in accordance with ASC 815, Derivatives and Hedging. The difference between the proceeds allocated to the 2026 Notes at issuance and the fair value of the conversion option was allocated to the host debt contract. ~~At June 30, 2022~~As of March 31, 2023 and December 31, ~~2021,~~2022, the fair value of the derivative was ~~$1.3 million~~$30 thousand and ~~$8.0~~$0.1 million, respectively, all of which was included in derivative liability, noncurrent, in ~~the~~our unaudited condensed consolidated balance sheets.

Total interest expense for the three months ended ~~June 30,~~March 31, 2023 was $4.3 million, of which $1.8 million related to contractual interest expense, $2.2 million related to derivative accretion, and $0.3 million related to debt issuance costs amortization. Total interest expense for the three months ended March 31, 2022 was $6.0 million, of which $2.5 million related to contractual interest expense, $3.1 million related to derivative accretion, and $0.4 million related to debt issuance costs amortization and for the six months ended June 30, 2022 was $12.0 million, of which $5.0 million related to contractual interest expense, $6.2 million related to derivative accretion, and $0.8 million related to debt issuance costs amortization. Total interest expense for the three and six months ended June 30, 2021 was $1.4 million, of which $0.6 million related to contractual interest expense, $0.7 million related to derivative accretion, and $0.1 million related to debt issuance costs amortization. Total other income for the three months ended ~~June 30,~~March 31, 2023 and 2022 included a ~~$1.8~~$26 thousand gain and a $4.8 million gain on the fair value of the derivative ~~liability. Total other income for the six months ended June 30,~~liability, respectively.

On August 12, 2022, ~~included a $6.7 million gain on the fair value of the derivative liability.~~

~~Revolving Line of Credit~~concurrently and ~~Term Loan~~

~~One of our subsidiaries had a loan and security agreement (the “Loan Agreement”) with a bank that allowed for maximum borrowings of $1.8 million on a revolving line of credit and a $10.8 million term loan. On June 9, 2021,~~ in connection with the ~~GigCapital2 merger,~~ ~~we paid off~~issuance of our 2025 senior secured convertible notes and indenture (see below), Oppenheimer & Co. Inc. (“OpCo”) commenced a private offer to repurchase approximately $45.0 million in aggregate principal amount of our 2026 Notes (the “2026 Notes Repurchase”). In connection with the ~~revolving line of credit and term loan balance of $1.8 million and $9.1 million, respectively, and~~2026 Notes Repurchase, OpCo entered into a note purchase agreement with each institutional investor pursuant to which OpCo agreed to purchase 2026 Notes from

1817

~~terminated the Loan Agreement. There were no unamortized debt issuance costs and thus no gain or loss was recognized on extinguishment.~~

~~Glocal Debt Facilities~~

~~Glocal’s debt facilities include INR-denominated term loans~~each investor, concurrently with ~~an aggregate carrying value~~each investor’s purchase of $0.6 million (or INR 48 million) and $0.7 million (or INR 54 million) as of June 30, 2022 and December 31, 2021, respectively. These term loans are primarily utilized for financing the construction of hospitals, administrative offices, equipment, and working capital, and are required to be repaid in monthly and quarterly installments with maturity dates extending to March 31, 2025. The loans are secured by mortgages on real property and personal guarantee of two Glocal Directors. The loans bear interest rates between 11.15% up to 16.25% per annum. During the three and six months ended June 30, 2022, Glocal repaid $0.1 million of the aggregate carrying value of the term loans. At June 30, 2022 and December 31, 2021 accrued interest on Glocal's debt facilities was $21 thousand and $23 thousand, respectively, and is included in accrued expenses2025 Notes in the ~~condensed consolidated balance sheets. For~~2025 Notes Offering (see below). At the ~~three and six months ended June 30, 2022, interest expense was $17 thousand and $40 thousand, respectively.~~

~~Prior~~closing, each investor had the ability to ~~being acquired, Glocal had been negotiating with its banks to restructure the payment terms~~sell $2.0 million in principal amount of ~~some~~2026 Notes at 100% of ~~the debt facilities above; these negotiations were completed~~par value for each $3.0 million in principal amount of 2025 Notes purchased in the ~~fourth quarter of 2021~~2025 Notes Offering. Concurrently and ~~Glocal was able to realize a forgiveness of debt of approximately $2.3 million.~~

~~Convertible Notes~~

~~On March 23, 2021, we issued a $4.1 million principal amount, 15.0% convertible note (the “2021 Note~~”) of which $0.5 million was to be converted and repaid in UpHealth common stock and the remainder in cash. The 2021 Note bears interest at a fixed rate of 15.0% per year, to begin accruing on June 15, 2021 if not repaid previous to this date. Total proceeds received from the 2021 Note were $3.0 million, net of original issue discount of $1.0 million. Additional debt issuance costs of $0.1 million for a placement fee were accrued, and paid at the closing. The principal and accrued interest of the 2021 Note was due and payable by us to the holder on the earlier of (1) the date that is one business day after the closing of the Business Combinations and we begin public trading, (2) the maturity date, which is nine months from the issuance of the 2021 Note, or (3) November 23, 2021, pursuant to its payment provisions. On June 9, 2021, in connection with the closing on August 18, 2022, OpCo purchased from each investor the principal amount of the ~~Business Combinations~~, ~~we paid~~2026 Notes set forth in each investor’s note purchase agreement, pursuant to and in accordance with the ~~holder~~terms thereof. Following the reverse split of shares, the remaining 2026 Notes are convertible into approximately 1,079,812 shares of common stock at a conversion price of $106.50 in accordance with the terms of the ~~2021 Note~~Indenture.

2025 Senior Secured Convertible Notes and Indenture

On August 12, 2022, we entered into an indenture (the “2025 Indenture”) with the ~~sum~~Indenture Trustee in its capacity as trustee thereunder, in respect of ~~$3.6~~the $67.5 million ~~and the remaining $0.5~~in aggregate principal amount of a new series of variable rate convertible senior secured notes due December 15, 2025 (the “2025 Notes”) issued to holders of our 2026 Notes in a private placement transaction (“2025 Notes Offering”), raising approximately $22.5 million ~~balance due to the holder was converted and exchanged into 50,000 shares~~in gross cash proceeds, net of ~~UpHealth common stock. Original issue discount and~~ debt issuance costs of ~~$0.5~~$2.2 million, ~~were written-off and~~ after paying for a ~~$31 thousand gain on extinguishment~~repurchase of ~~debt was recognized and included in other income, net, including interest income, in the condensed consolidated statements of operations.~~

~~On January 6, 2021, we issued a $1.5~~$45.0 million ~~principal amount, 5.0% convertible note due January 6, 2026 (the “2026 5% Note”). The 2026 5% Note is unsecured and bears interest at a fixed rate of 5.0% per year and, unless earlier converted, the principal and accrued interest~~ of the 2026 ~~5% Note will be due and payable by us at any time on or after~~Notes, which net proceeds were used in part to fully repay the ~~maturity date at our election or upon demand by~~Seller Notes (see below). The debt issuance costs consisted of cash paid in the holder. On June 9, 2021, in connection with the closing of the Business Combinations, the 2026 5% Note was converted into 150,367 shares of UpHealth common stock, representing the total outstanding principal balance and unpaid accrued interestamount of $1.5 million and ~~$30 thousand, respectively. A $0.1 million gain on extinguishment was recognized and included in~~ ~~other income, net, including interest income, in~~the ~~condensed consolidated statements~~issuance of ~~operations.~~

~~Paycheck Protection Program Loans~~

~~In April 2020, three~~115,000 shares of common stock, following the reverse stock split, with a value of $0.7 million. The 2025 Notes are convertible following the reverse split of our shares into 3,857,142 shares of our common stock at a conversion price, subject to the occurrence of certain corporate events, of $17.50 per share. The 2025 Notes are senior secured obligations of UpHealth, secured by substantially all of our assets and those of our domestic subsidiaries, ~~obtained~~and accrue interest at a ~~U.S. government subsidy~~rate equal to the daily secured overnight financing rate (“SOFR”) plus 9.0% per annum, with a minimum rate of ~~$0.5~~10.5% per annum, payable quarterly in arrears, for a quarterly rate of 12.21% for our December 15, 2022 interest payment date. The 2025 Notes will mature on December 15, 2025, unless earlier repurchased, redeemed or converted. Holders will have the right to convert their 2025 Notes at any time. Upon the occurrence of certain corporate events, holders of the 2025 Notes can require us to repurchase for cash all or part of their 2025 Notes in principal amounts of $1,000 or an integral multiple thereof at a repurchase price that will be equal to 105% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest thereon, if any. In the event that we sell assets with net proceeds in excess of $15.0 million, ~~$1.0 million~~then it will make an offer to all holders of the 2025 Notes to repurchase the 2025 Notes for an aggregate amount of cash equal to 20.0% of the net proceeds of such asset sale, at a repurchase price per 2025 Note equal to 100.0% of the principal amount thereof, plus accrued and ~~$1.9 million (representing 5 loan agreements), respectively, under the Paycheck Protection Program (“PPP”). The PPP is a U.S. government temporary program created with the intent to provide a subsidy to assist businesses in keeping employees employed during the pandemic. The PPP loan~~unpaid interest, if any. We may not ~~need~~otherwise seek to ~~be repaid if certain requirements are met. Under~~redeem the ~~Coronavirus Aid, Relief and Economic Security (“CARES Act”), as modified, any amounts not forgiven~~2025 Notes prior to June 16, 2024. We will be required to be repaid over a term having a minimum of five years and a maximum maturity of 10 years from the date on which the borrower applies for forgiveness. The loans carry a 1.0% interest rate.

~~One of our subsidiaries applied for forgiveness~~settle conversions solely in shares of its ~~$0.5 million PPP loan during 2020 and it was forgiven~~common stock, except for payments of cash in full and the subsidiary legally released from repaying the loan by the SBA in June 2021. The forgiveness was recognized as a measurement period adjustment to goodwill during the three months ended June 30, 2021.lieu of fractional shares.

~~One of our subsidiaries submitted a request~~Total interest expense for forgiveness of its $1.0 million PPP loans during 2021 and it was forgiven in full and the subsidiary legally released from repaying the loan by the SBA in August 2021. The forgiveness was recognized as a measurement period adjustment to goodwill during the three months ended September 30, 2021.

One of our subsidiaries applied for forgiveness of its $1.9 million PPP loans during 2020, of which 3 of the loans, totaling $0.7 million, were forgiven in full by the SBA and the subsidiary was legally released from repaying the loans. In February 2021 and March 2021, the remainder of the PPP loans totaling $0.9 million and $0.3 million, respectively, were forgiven by the SBA and the subsidiary was legally released from repaying the loans. We recorded this as a measurement period adjustment to goodwill during the three months ended March 31, ~~2021.~~2023 was $2.5 million, of which $2.3 million related to contractual interest expense and $0.2 million related to debt issuance costs amortization.

~~Provider Relief Funds~~

~~Provider Relief Funds (“PRF”) were made available by~~In March 2023, the ~~U.S. Department of Health and Human Services (“HHS~~”)Indenture Trustee, in its capacity as ~~part of a $100 billion appropriation as part~~calculation agent, notified us of the ~~CARES Act’s Provider Relief Fund. In April and July 2020, one~~quarterly rate reset of 14.03% for our subsidiaries received PRF proceeds aggregating $0.2 million, and in January 2021, another subsidiary received PRF proceeds aggregating $0.5 million. The PRF amounts received will not require repayment as long as the subsidiaries comply with certain terms and conditions outlined by HHS. The terms and conditions first require the subsidiaries to identify health care-related expenses attributed to COVID-19 that another source has not reimbursed or is obligated to reimburse. If those expenses do not exceed the funding received, the subsidiaries then apply the funds to patient care lost revenue. On JanuaryJune 15, ~~2021 HHS released a Post-Payment Notice of Reporting Requirements Notice that provides healthcare providers three options to calculate patient care lost revenue.~~

During the three months ended March 31, 2022, one subsidiary had used $0.1 million of the PRF funds and returned the remaining $0.1 million to HHS and the other subsidiary had used all $0.5 million of the PRF funds under the terms and conditions and restrictions for the CARES Act relative to these funds.2023 interest payment date.

Related Party Debt

One of our subsidiaries has notes payable to related parties totaling ~~$0.7~~$0.2 million ~~at June 30, 2022~~and $0.3 million as of March 31, 2023 and December 31, ~~2021.~~2022. The notes bear interest at rates of 3.50% per annum. ~~Notes totaling $0.7 million~~The notes are payable in 8eight quarterly installments starting from October 1, 2022, or upon a liquidity event, as defined in the note agreement. The accrued interest payable was ~~$60 thousand and $39 thousand at June 30, 2022~~zero as of both March 31, 2023 and December 31, ~~2021, respectively, and is included in accrued expenses in the condensed consolidated balance sheets.~~2022. Interest expense was ~~$11~~$3 thousand and $7$10 thousand for the three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and $21 thousand and $8 thousand for the six months ended June 30, 2022 and 2021,~~ respectively.

Seller Notes

As part of the purchase price consideration for several of UpHealth Holdings’ merger entities, we entered into ~~secured~~ seller notes payable to their former shareholders, of which ~~one secured interest has been perfected. The seller notes~~ accrue interest at specific rates, per the respective merger agreements. On June 9, 2021, in connection with the closing of the Business Combination, we paid $88.1 million of the seller notes. In August 2021, we paid an additional $11.1 million of the seller notes and deferred the maturity date to September 2022. In August 2022, ~~for~~we paid the remaining $18.7 million of ~~the~~ seller ~~notes. At June 30, 2022~~notes plus accrued interest of $1.9 million. As of both March 31, 2023 and December 31, ~~2021,~~2022, the seller notes totaled ~~$18.7 million.~~zero.

~~The accrued~~Accrued interest payable was ~~$1.7 million and $0.7 million at June 30, 2022~~zero as of both March 31, 2023 and December 31, ~~2021, respectively, and is included in accrued expenses in the condensed consolidated balance sheets.~~2022. Interest expense was ~~$0.5 million~~zero and ~~$0.4~~$0.5 million for the three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and $0.9 million and $0.8 million for the six months ended June 30, 2022 and 2021,~~ respectively.

9. Fair Value of Financial Instruments

We estimate the fair value of our financial instruments using available market information and valuation methodologies we believe to be appropriate. As of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the fair values of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued expenses approximate their carrying values due to the short-term nature of these instruments. Additionally, the fair values of short-term and long-term debt instruments approximate their carrying values.

The fair value hierarchy is as follows:

Level 1 - Quoted (unadjusted) prices in active markets for identical assets or liabilities.

Level 2 - Other observable inputs, either directly or indirectly, other than quoted prices included in Level 1, including:

•Quoted prices for similar assets/liabilities in active markets;

•Quoted prices for identical or similar assets/liabilities in non-active markets (e.g., few transactions, limited information, non-current prices, high variability over time);

•Inputs other than quoted prices that are observable for the asset/liability (e.g., interest rates, yield curves, volatilities, default rates); and

•Inputs that are derived principally from or corroborated by other observable market data.

Level 3 - Unobservable inputs that cannot be corroborated by observable market data.

The following tables present information about our financial assets and liabilities measured at fair value on are recurring basis:


		June 30, 2022									March 31, 2023
(In thousands)	(In thousands)	Level 1		Level 2		Level 3		Total		(In thousands)	Level 1		Level 2		Level 3		Total
Assets:	Assets:									Assets:
Cash equivalents - money market funds	Cash equivalents - money market funds	$	18,451	$	—	$	—	$	18,451	Cash equivalents - money market funds	$	96	$	—	$	—	$	96
		$	18,451	$	—	$	—	$	18,451		$	96	$	—	$	—	$	96
Liabilities:	Liabilities:									Liabilities:
Derivative liability	Derivative liability	$	—	$	—	$	1,307	$	1,307	Derivative liability	$	—	$	—	$	30	$	30
Warrant liability	Warrant liability	—		61		—		61		Warrant liability	—		17		—		17
		$	—	$	61	$	1,307	$	1,368		$	—	$	17	$	30	$	47


		December 31, 2021									December 31, 2022
(In thousands)	(In thousands)	Level 1		Level 2		Level 3		Total		(In thousands)	Level 1		Level 2		Level 3		Total
Assets:	Assets:									Assets:
Cash equivalents - money market funds	Cash equivalents - money market funds	$	45,006	$	—	$	—	$	45,006	Cash equivalents - money market funds	$	1,681	$	—	$	—	$	1,681
		$	45,006	$	—	$	—	$	45,006		$	1,681	$	—	$	—	$	1,681
Liabilities:	Liabilities:									Liabilities:
Derivative liability	Derivative liability	$	—	$	—	$	7,977	$	7,977	Derivative liability	$	—	$	—	$	56	$	56
Warrant liability	Warrant liability	—		252		—		252		Warrant liability	—		9		—		9
		$	—	$	252	$	7,977	$	8,229		$	—	$	9	$	56	$	65

Money Market Funds

~~At June 30, 2022~~As of March 31, 2023 and December 31, ~~2021,~~2022, our cash equivalents consisted of money market funds which were classified as Level 1. We used observable prices in active markets in determining the classification of our money market funds as Level 1. There were no transfers between the hierarchy levels during the three ~~and six~~ months ended ~~June 30, 2022~~March 31, 2023 and the year ended December 31, ~~2021.~~2022.

Cash equivalents ~~at June 30, 2022~~as of March 31, 2023 and December 31, ~~2021~~2022 were as follows:


		June 30, 2022									March 31, 2023
(In thousands)	(In thousands)	Amortized Cost		Unrealized Gain		Unrealized Loss		Fair Value		(In thousands)	Amortized Cost		Unrealized Gain		Unrealized Loss		Fair Value
Cash equivalents:	Cash equivalents:									Cash equivalents:
Money market funds	Money market funds	$	18,451	$	—	$	—	$	18,451	Money market funds	$	96	$	—	$	—	$	96
Total cash equivalents	Total cash equivalents	$	18,451	$	—	$	—	$	18,451	Total cash equivalents	$	96	$	—	$	—	$	96

December 31, 2021
(In thousands) Amortized Cost Unrealized Gain Unrealized Loss Fair Value
Cash equivalents:
Money market funds $ 45,006 $ — $ — $ 45,006
Total cash equivalents $ 45,006 $ — $ — $ 45,006


	December 31, 2022
(In thousands)	Amortized Cost		Unrealized Gain		Unrealized Loss		Fair Value
Cash equivalents:
Money market funds	$	1,681	$	—	$	—	$	1,681
Total cash equivalents	$	1,681	$	—	$	—	$	1,681

Derivative Liability

~~At June 30,~~As of March 31, 2023 and December 31, 2022,, the fair value of the derivative was ~~$1.3~~$30 thousand and $0.1 million, ~~all of which was included in derivative liability, noncurrent in the condensed consolidated balance sheets. At December 31, 2021, the fair value of the derivative was $8.0 million, all of~~respectively, which was included in derivative liability, noncurrent in ~~the~~our unaudited condensed consolidated balance sheets. Total other income for the three months ended ~~June 30,~~March 31, 2023 and 2022 included a ~~$1.8~~gain of $26 thousand and $4.8 million, ~~gain on the fair value of the derivative liability. Total other income for the six months ended June 30, 2022 included a 6.7 million gain~~respectively, on the fair value of the derivative liability.

The fair value of the derivative liability is considered a Level 3 valuation and is determined using a Binomial Lattice Option Pricing Model. The significant assumptions used in the model were:


		June 30, 2022	December 31, 2021		March 31, 2023	December 31, 2022
Stock price	Stock price	$0.59	$2.24	Stock price	$1.49	$1.63
Volatility	Volatility	94.0%	82.5%	Volatility	95.0%	95.0%
Risk free rate	Risk free rate	3.00%	1.18%	Risk free rate	3.79%	4.17%
Exercise price	Exercise price	$10.65	$10.65	Exercise price	$106.50	$106.50
Expected life (in years)	Expected life (in years)	3.95	4.44	Expected life (in years)	3.19	3.44
Conversion periods	Conversion periods	2-5 years	2-5 years	Conversion periods	2-4 years	2-4 years
Future share price	Future share price	$0.01-$38.53	$0.01-$34.05	Future share price	$0.10-$303.10	$0.10-$405.60

2021 Private Placement Warrants and 2021 PIPE Warrants

~~At June 30, 2022,~~As of March 31, 2023, the fair value of the 2021 Private Placement Warrants (the “2021 Private Placement Warrants”) and the 2021 PIPE Warrants (the “2021 PIPE Warrants”) was determined to be ~~$0.07~~$0.02 per warrant, totaling ~~$40~~$11 thousand and ~~$21~~$6 thousand respectively, and are included in warrant liabilities in ~~the~~our unaudited condensed consolidated balance sheets. AtAs of December 31, ~~2021,~~2022, the fair value of the 2021 Private Placement Warrants and the 2021 PIPE Warrants was determined to be ~~$0.29~~$0.01 per warrant, totaling ~~$0.2 million~~$6 thousand and ~~$0.1 million~~$3 thousand respectively, and are included in warrant liabilities in ~~the~~our unaudited condensed consolidated balance sheets. During the three ~~and six~~ months ended ~~June 30, 2022,~~March 31, 2023, we recorded a $5 thousand gain ~~in the amount of $0.1 million and $0.2 million, respectively,~~ due to the fair value changes in the 2021 Private Placement Warrants and a $3 thousand due to fair value changes in the 2021 PIPE Warrants, both of which isare included in gain in fair value of warrant liabilities in our unaudited condensed consolidated statements of operations. During the three months ended March 31, 2022, we recorded a $0.1 million gain due to the fair value changes in the 2021 Private Placement Warrants and a $33 thousand gain due to fair value changes in the 2021 PIPE Warrants, both of which are included in gain in fair value of warrant liabilities in our unaudited condensed consolidated statements of operations.

There were no transfers between fair value levels during the three ~~and six~~ months ended ~~June 30, 2022~~March 31, 2023 and year ended December 31, ~~2021.~~2022.

10. Capital Structure

2023 Private Placement

On March 9, 2023, we entered into a Securities Purchase Agreement, with a single institutional investor, pursuant to which, in a private placement (the “2023 Private Placement”), we agreed to issue and sell (i) 1,650,000 shares of our common stock, par value $0.0001 per share; (ii) warrants that are exercisable six months from the date of issuance and will have a term of five years from the initial exercise date to purchase up to an additional 3,000,000 shares of our common stock (the “Series A Warrants”); (iii) warrants that are exercisable six months from the date of issuance and will have a term of two years from the initial exercise date to purchase up to an additional 3,000,000 shares of our common stock (the “Series B Warrants” and, collectively with Series A Warrants, the “Common Stock Purchase Warrants”); and (iv) pre-funded warrants (the “Pre-Funded Warrants,” and together with the Common Stock Purchase Warrants, the “Private Placement Warrants”) to purchase an additional 1,350,000 shares of our common stock (all of such shares issuable upon exercise of the Warrants, the “Warrant Shares”). On March 13, 2023, we announced that we completed the closing of the 2023 Private Placement. The purchase price of each share of common stock sold in the 2023 Private Placement was $1.50, the exercise price of each Common Stock Purchase Warrants (as defined above) is $2.04, and the exercise price of each Pre-

Funded Warrant is $0.0001 and the purchase price of each Pre-Funded Warrant was $1.4999. The aggregate gross proceeds to us from the 2023 Private Placement were approximately $4.5 million, before deducting $0.3 million of placement agent fees and other offering expenses. We intend to use the net proceeds from the offering for general corporate purposes, including working capital.

Common Stock Reserved for Future Issuance

~~Shares~~The following table summarizes shares of common stock reserved for future issuance as of ~~June 30, 2022 were as follows:~~March 31, 2023 (recorded on a post-reverse split basis):


(In thousands)			Number of Shares
Restricted stock units outstanding			~~3,672~~1,342
Stock options outstanding			~~1,418~~138
Shares issuable upon conversion of 2025 Notes			3,857
Shares issuable upon conversion of 2026 Notes			~~15,023~~1,080
Shares issuable upon conversion of 2021 Public Warrants			~~17,250~~1,725
Shares issuable upon conversion of 2021 Private Warrants			~~568~~57
Shares issuable upon conversion of 2021 PIPE Warrants			~~300~~29
Shares issuable upon conversion of the 2023 Private Placement Series A Warrants			3,000
Shares issuable upon conversion of the 2023 Private Placement Series B Warrants			3,000
Shares issuable upon conversion of the 2023 Private Placement Pre-Funded Warrants			1,350
Shares available for future grant under 2021 EIP			~~15,759~~1,032
			~~53,990~~16,610

~~Forward Share Purchase Agreement~~

2015 Cloudbreak Incentive Plan

~~On June 3, 2021, we entered into~~

The following table summarizes stock option activity under the Cloudbreak Plan (recorded on a ~~third-party put option arrangement with Kepos Alpha Fund L.P. (“~~post-reverse split basis):

~~KAF”), a Cayman Islands~~

limited partnership, whereby we assumed the obligation to repurchase our common stock at a future date by transferring cash to KAF under certain conditions. Due to its mandatorily redeemable for cash feature, we recorded such obligation as a forward share purchase liability, and the $18.1 million of cash held in escrow as restricted cash, in our condensed consolidated balance sheets at December 31, 2021. In April 2022, in accordance with the Purchase Agreement, KAF transferred the 1,700,000 shares of our common stock to us and we transferred to KAF the $18.5 million in cash previously held in escrow. The 1,700,000 shares of common stock are recorded as treasury stock in our condensed consolidated balance sheets.


	Number of Shares	Weighted Average Exercise Price Per Share
Outstanding as of December 31, 2022	138	$	50.76
Options exercised	—	$	—
Outstanding as of March 31, 2023	138	$	50.76

2021 Equity Incentive Plan

The following table summarizes our RSU activity under the 2021 ~~EIP:~~EIP (recorded on a post-reverse split basis):


	Number of Shares	Weighted Average Grant Date Fair Value Per Share
Outstanding as of December 31, 2022	878	$	6.61
RSUs granted	663	$	2.03
RSUs vested and released	(82)	$	16.09
RSUs forfeited	(117)	$	7.11
Outstanding as of March 31, 2023	1,342	$	3.73


			~~Number of Shares~~			~~Weighted Average Grant Date Fair Value Per Share~~

11. Income Taxes

2221

Outstanding at December 31, 2021 10,693 5.63
RSUs granted 598 2.13
RSUs exercised and released (338) 2.13
RSUs forfeited (207) 1.93
Outstanding at March 31, 2022 10,746 5.61
RSUs granted 135 1.00
RSUs vested and issued (5,563) 8.80
RSUs forfeited (1,645) 1.93
Outstanding at June 30, 2022 3,672 2.27

~~In July and August~~Consistent with our conclusion as of December 31, 2022, we ~~granted~~continue to believe that it is not more likely than not that the deferred tax assets will be realized and we therefore maintained a ~~total of 8,523,783 RSUs to new and existing employees.~~

~~11. Commitments and Contingencies~~

~~Commitments~~

~~We lease various facilities with related parties in accordance with~~full valuation allowance against the ~~terms of operating lease agreements that expire at various dates through November 2026. The leases require monthly payments ranging from $3 thousand to $32 thousand.~~

We lease various facilities and office equipment from third parties in accordance with the terms of operating lease agreements requiring monthly payments ranging from $7 to $60 thousand. The leases expire at various dates through September 2046. In accordance with the lease terms, we may be required to deposit funds with the lessors in the form of a security deposit. The deposits may be returned to us if certain conditions are met, as stated in the lease agreements. Security deposits totaled approximately $0.2 milliondeferred tax assets as of ~~June 30, 2022 and December 31, 2021.~~

~~Total rent expense under related party and third-party agreements consisted of the following:~~

(In thousands) Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Related party $ 218 $ — $ 400 $ —
Third-party 1,106 796 1,976 1,350
Sublease Income (149) — (246) —
Total, net of sublease income $ 1,473 $ 796 $ 2,622 $ 1,350

~~During the six months ended June 30, 2022, we recorded lease abandonment expense totaling $0.1 million related to a termination fee we paid to exit an office lease.~~

~~As of June 30, 2022, future minimum lease payments under non-cancelable operating leases were as follows:~~

(In thousands) Related
Party Third- Party Sublease Income Minimum Lease Payments, Net of Sublease Income
Remaining 2022 $ 405 $ 1,469 $ (235) $ 1,639
2023 809 2,478 (403) 2,884
2024 809 2,126 (408) 2,527
2025 809 1,464 (420) 1,853
2026 34 1,006 (433) 607
Thereafter — 430 (72) 358
$ 2,866 $ 8,973 $ (1,971) $ 9,868

~~In March 2022, we entered into a Commercial Agreement (the “Commercial Agreement”) with McKinsey & Company, Inc. United States and its affiliates (“McKinsey”), which provides that McKinsey will assist in implementing a transformation of UpHealth (the “Project~~”). As consideration for the services performed under the Commercial Agreement, we will pay McKinsey (i) a fixed fee of $3.0 million, (ii) a fee of $1.2 million, reflecting an amount previously expensed and payment deferred from a previously completed project, (iii) up to $3.0 million of fees based on the achievement of certain milestones, and (iv) incentive fees with a target value of

~~$3.0 million based on the achievement of certain targets. The Commercial Agreement will remain in effect until~~ March 31, 2024, unless earlier terminated by either party in accordance with the terms set forth therein. In the event that the Project is terminated by us, or by McKinsey for cause, we will pay to McKinsey a termination fee in an amount that is to be determined based in part on when the termination occurs and the amount previously paid. As of June 30, 2022, fees accrued under the Commercial Agreement totaled $3.6 million, which is included in accounts payable in the condensed consolidated balance sheets and in acquisition, integration, and transformation costs in the condensed consolidated statements of operations.

~~Contingencies~~

~~From time to time, we may be subjected to claims or lawsuits which arise in the ordinary course of business, including the previously disclosed tax matter (see Note 12,~~ ~~Income Taxes~~, for further information) and matters described below. Estimates for resolution of legal and other contingencies are accrued when losses are probable and reasonably estimable in accordance with ASC 450, ~~Contingencies~~. In the opinion of management, after consulting with legal counsel, none of these other claims are currently expected to have a material adverse effect on our consolidated results of operations, financial position or cash flows.

~~Advisory Services Agreement Dispute~~

We are in a services agreement dispute with a third-party advisory firm for fees due under the services agreement. The advisory firm claims $31.0 million, plus interest, is owed in fees. Based on consultation with legal counsel, we previously proposed a settlement in the amount of $8.0 million, which has been accrued for as of June 30, 2022 and December 31, 2021, and is included in accrued expenses in the condensed consolidated balance sheets. The amount of the ultimate loss may range from $8.0 million to $26.3 million.

~~COVID-19~~

The COVID-19 pandemic has not had a material adverse impact on the Company’s reported results to date and is currently not expected to have a material adverse impact on its near-term outlook. However, UpHealth is unable to predict the longer-term impact that the pandemic may have on its business, future results of operations, financial position or cash flows due to numerous uncertainties.

~~Indemnification~~

Certain of our agreements require us to indemnify our customers from any claim or finding of intellectual property infringements, as well as from any losses incurred relating to breach of representations, failure to perform, or specific events as outlined within the particular contract. We have not received any claims or estimated the maximum potential amount of indemnification liability under these agreements and have recorded no liabilities for these agreements.

~~12. Income Taxes~~

For interim period reporting, we record income taxes using an estimated effective tax rate for the period, including the forecasted permanent tax differences and statutory rates in jurisdictions in which we operate. At the end of each interim period, we update the estimated effective tax rate, and if the estimated tax rate changes based on new information, we make a cumulative adjustment in the period. We record the tax effect of an unusual or infrequently occurring item in the interim period in which it occurs as a discrete item of tax.2023. As a result, of not having a reliable forecast of tax expense for Glocal, we excluded Glocal from our estimated effective tax rate for the period and instead computed an income tax provision for Glocal on a year-to-date discrete basis. Excluding Glocal, our estimated effective tax rate for the remainder of our consolidated group was 16.1%, which is lower than the U.S. federal statutory rate of 21% primarily due to the 162(m) permanent addback, the non deductible interest expense on convertible notes and the global intangible low taxed income (GILTI) inclusion, partially offset by the impact of state and local income taxes. In the aggregate, these items reduce the forecasted tax benefit that would otherwise be generated on the forecasted pre-tax loss in the U.S., thereby reducing the estimated annual effective tax ~~rate. The operations in India~~rate for 2023 is expected to be 0% because our forecasted losses are ~~generally taxed at rates ranging between 25% and 31%.~~expected to generate no income tax benefit. Furthermore, there were no discrete tax items for the quarter ended March 31, 2023.

The income tax benefit was ~~$2.2 million~~zero and ~~$6.6~~$2.3 million for the three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and $4.5 million and $7.1 million for the six months ended June 30, 2022 and 2021,~~ respectively.

The Internal Revenue Service (“~~IRS~~”IRS”) audited Thrasys’ 2008 and 2009 tax returns for the proper year of inclusion of approximately $15.0 million long-term capital gain on the sale of certain intellectual property rights. Thrasys originally reported the gain on its 2010 S Corporation tax return, matching the year of inclusion for financial accounting purposes. The corporate level tax was paid to California and Thrasys passed the gain through to its shareholders. The IRS has asserted that Thrasys owes C Corporation tax of approximately ~~$5.0~~$5.0 million for 2008, or in the alternative, Thrasys owes C Corporation tax of approximately $5.0 million for 2009 as a built-in gain. In addition, Thrasys could be assessed additional California franchise tax of approximately $1.3 million. Additionally, if additional income taxes are imposed, interest will be charged at approximately 4% per year, compounded annually, resulting in potential interest of approximately $3.0 million. The IRS has not asked that penalties be imposed.

The matter is currently pending before the U.S. Tax Court, Docket 11565-15. There are related tax cases for some of the shareholders for additional income taxes due if the gain is shifted to 2009. On December 4, 2018, the IRS filed a motion for summary judgment in Thrasys, Inc. v. Commissioner (T.C. Memo 2018-199); however, Thrasys prevailed, and the motion was denied. In January 2020, Thrasys filed a motion for summary judgment arguing that either the gain was properly reported in 2010 and all taxes have been paid or in the alternative it should have been taxable in 2009 with no built-in gains tax. In both cases, there would be no additional income tax due for 2008 or 2009. The IRS filed an objection to Thrasys’ motion. On March 3, 2021, the U.S. Tax Court, without consideration of the merits of the case, issued a very brief court order dismissing Thrasys’ motion. Had the motion been granted, the need for a trial would have been obviated. Counsel for the IRS has contacted counsel for Thrasys and has offered to join Thrasys in a motion to have the case decided without trial. This and other alternatives are now under consideration. It is not likely this case will be resolved before the end of 2022. Thrasys intends to vigorously defend its position in the case and believes it will prevail if the case is taken to trial. ~~Thrasys has~~We have accrued $0.2 million representing probable additional taxes and interest imposed, in other liabilities, current ~~liabilities~~ in the unaudited condensed consolidated balance sheets.

~~13.~~12. Earnings (Loss) Per Share

Basic ~~income~~earnings (loss) per share applicable to common stockholders is computed by dividing earnings applicable to common stockholders by the ~~weighted-average~~weighted average number of common shares outstanding. Diluted ~~income~~earnings (loss) per share assumes the conversion of any convertible securities using the treasury stock method or the if-converted method.


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended March 31,
(In thousands, except per share data)	(In thousands, except per share data)	2022		2021		2022		2021		(In thousands, except per share data)	2023		2022
Numerator:	Numerator:									Numerator:
Net loss attributable to UpHealth, Inc.		$	(12,438)	$	(32,783)	$	(29,883)	$	(35,732)
Net income (loss) attributable to UpHealth, Inc.										Net income (loss) attributable to UpHealth, Inc.	$	(8,083)	$	(17,445)
Denominator:	Denominator:									Denominator:
Weighted average shares outstanding(1)	Weighted average shares outstanding(1)	144,624		94,170		144,581		83,585		Weighted average shares outstanding(1)	15,730		14,454
Diluted effect of stock options										Diluted effect of stock options	—		—
Diluted effect of RSUs										Diluted effect of RSUs	—		—
Weighted average shares outstanding assuming dilution	Weighted average shares outstanding assuming dilution	144,624		94,170		144,581		83,585		Weighted average shares outstanding assuming dilution	15,730		14,454
Net loss per share attributable to UpHealth, Inc.:
Net income (loss) per share attributable to UpHealth, Inc.:										Net income (loss) per share attributable to UpHealth, Inc.:
Basic	Basic	$	(0.09)	$	(0.35)	$	(0.21)	$	(0.43)	Basic	$	(0.51)	$	(1.21)
Diluted	Diluted	$	(0.09)	$	(0.35)	$	(0.21)	$	(0.43)	Diluted	$	(0.51)	$	(1.21)

(1) The shares and earnings per share ~~available to~~as of March 31, 2022 differ from those published in our ~~common stock holders,~~ prior tocondensed consolidated financial statements as they were retrospectively adjusted as a result of the ~~Business Combinations, have been recast to reflect the exchange ratio established~~Reverse Stock Split (as described in ~~the~~Note 1, Organization and Business ~~Combinations (1.0 UpHealth Holdings share to 10.28 GigCapital2 share). See Note 3,~~ ~~Business Combinations, for more information.~~).

For the three months ended ~~June 30,~~March 31, 2023, the calculation of basic and dilutive earnings per share included the 1.35 million pre-funded warrants with an exercise price of $0.0001, as the shares are issuable for little consideration, and excluded outstanding warrants to purchase 1.8 million shares of common stock at $115.00 per share; 6.0 million Common Stock Purchase Warrants at $2.04 per share; 0.1 million of stock options; 1.3 million of RSUs; 2025 Notes convertible into 3.9 million shares of common stock at a conversion price, subject to the occurrence of certain corporate events, of $17.50 per share; and 2026 Notes, convertible into 1.1 million shares of common stock at $106.50 per share, because the effect would be anti-dilutive. For the three months ended March 31, 2022, the calculation of dilutive earnings per share excluded outstanding warrants to purchase ~~18.1~~1.8 million shares of common stock at ~~$11.50~~$115.00 per share; ~~0.2 million~~23 thousand of stock options; ~~and senior convertible notes,~~2026 Notes convertible into ~~15.0~~1.5 million shares of common stock at ~~$10.65~~$106.50 per ~~share, because the effect would be anti-dilutive. For the six months ended June 30, 2022, the calculation of dilutive earnings per share excluded outstanding warrants to purchase 18.1~~

share; and 0.2 million shares of common stock at $11.50 per share; 0.2 million of stock options; senior convertible notes and convertible into 15.0 million shares of common stock at $10.65 per share; and 1.7 million shares of treasury stock acquired under the terms of the forward share purchase agreement, because the effect would be anti-dilutive.

~~14.~~13. Related Party Transactions

One of our subsidiaries had amounts due to the seller of the subsidiary, in a prior transaction unrelated to the merger with UpHealth Holdings, representing contingent consideration, accrued interest, and accrued preferred dividends totaling ~~$4.2 million. The amount was paid in full during the three months ended June 30, 2021.~~

The subsidiary also has a management agreement with a related party (our chief financial officer, who is the former shareholder and chairman of the subsidiary). Management fee expenses incurred were none and approximately $0.1 million for the three and six months ended June 30, 2022 and 2021, respectively. Ther~~e were~~ ~~no unpaid management fees~~ ~~at June 30, 2022 and December 31, 2021.~~

~~The consulting firm noted in Note 8,~~ ~~Debt, is a related party through an officer of the Company, who is also a significant shareholder and a member of our board of directors.~~

See Note 8, Debt, for related party ~~long-term~~ debt.

See Note ~~11,~~16, Commitments and Contingencies, for leases with related parties.

~~The Company makes~~We make guaranteed payments to related parties. Guaranteed payments aggregated ~~$1.4~~$0.4 million and ~~none~~$1.4 million for the three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021, respectively and $2.8 million and none for the six months ended June 30, 2022 and 2021,~~ respectively. These amounts are presented in cost of ~~goods and services~~revenues in ~~the~~our unaudited condensed consolidated statements of operations. We had unpaid guaranteed payments of ~~$0.1~~$0.2 million and ~~$0.3~~$0.5 million as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively, which is included in accrued liabilities ~~on the~~in our unaudited condensed consolidated balance sheets.

~~Due to and due from related parties consisted of the following:~~

In thousands June 30, 2022 December 31, 2021
Due from related parties 31 40
Due to related parties 458 47

~~15.~~14. Segment Reporting

Our business is organized into 3three operating business segments and 1one non-operating business segment:

•Integrated Care Management—through our Thrasys subsidiary;

•Virtual Care Infrastructure—through our Cloudbreak and Glocal an~~d Cloudbreak~~ subsidiaries~~subsidiaries;~~(1);

•Services—through our Innovations Group, BHS, and TTC subsidiaries; and

•Corporate—through UpHealth and our UpHealth Holdings subsidiary.

(1) As discussed in Note 1, Organization and Business, we deconsolidated Glocal during the three months ended September 30, 2022; accordingly, the financial results of Glocal for the three months ended March 31, 2022 are included in our unaudited condensed consolidated financial statements, and the financial results of Glocal as of March 31, 2023 and December 31, 2022 and for the three months ended March 31, 2023 are not included in our unaudited condensed consolidated financial statements.

We evaluate performance based on several factors, of which ~~Revenue,~~Revenues, Gross ~~Margin, Adjusted EBITDA,~~Profit, and Total Assets are the primary financial measures:

~~Revenue~~Revenues by segment consisted of the following:


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended March 31,
In thousands	In thousands	2022		2021		2022		2021		In thousands	2023		2022
Integrated Care Management	Integrated Care Management	$	7,823	$	11,280	$	10,435	$	17,569	Integrated Care Management	$	3,873	$	2,612
Virtual Care Infrastructure(1)	Virtual Care Infrastructure(1)	16,815		6,964		32,445		7,554		Virtual Care Infrastructure(1)	17,458		15,630
Services	Services	19,030		13,638		36,760		19,575		Services	20,814		17,730
Total revenue		$	43,668	$	31,882	$	79,640	$	44,698
Total revenues										Total revenues	$	42,145	$	35,972

(1) As discussed in Note 1, Organization and Business, we deconsolidated Glocal during the three months ended September 30, 2022; accordingly, the financial results of Glocal for the three months ended March 31, 2022 are included in our unaudited condensed consolidated financial statements, and the financial results of Glocal for the three months ended March 31, 2023 are not included in our unaudited condensed consolidated financial statements.

Gross ~~margin~~profit by segment consisted of the following:


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended March 31,
In thousands	In thousands	2022		2021		2022		2021		In thousands	2023		2022
Integrated Care Management	Integrated Care Management	$	6,894	$	4,504	$	8,531	$	9,723	Integrated Care Management	$	2,580	$	1,638
Virtual Care Infrastructure(1)	Virtual Care Infrastructure(1)	8,179		2,634		15,588		2,933		Virtual Care Infrastructure(1)	10,185		6,501
Services	Services	7,320		4,254		13,578		5,666		Services	9,911		5,852
Total gross margin		$	22,393	$	11,392	$	37,697	$	18,322
Total gross profit										Total gross profit	$	22,676	$	13,991

condensed consolidated financial statements, and the financial results of Glocal for the three months ended March 31, 2023 are not included in our unaudited condensed consolidated financial statements.

Total assets by segment consisted of the following:


In thousands	In thousands	June 30, 2022		December 31, 2021		In thousands	March 31, 2023		December 31, 2022
Integrated Care Management	Integrated Care Management	$	165,995	156,106		Integrated Care Management	$	45,132	44,776
Virtual Care Infrastructure(1)	Virtual Care Infrastructure(1)	208,552		217,668		Virtual Care Infrastructure(1)	140,311		140,776
Services	Services	128,861		127,114		Services	126,142		124,980
Corporate	Corporate	16,803		68,419		Corporate	27,212		29,272
Total assets	Total assets	$	520,211	$	569,307	Total assets	$	338,797	$	339,804

(1) As discussed in Note 1, Organization and Business, we deconsolidated Glocal during the three months ended September 30, 2022; accordingly, the financial position of Glocal as of March 31, 2023 and December 31, 2022 and for the three months ended March 31, 2023 are not included in our unaudited condensed consolidated financial statements.

Total assets by geography consisted of the following:


In thousands	March 31, 2023		December 31, 2022
Americas	$	317,597	339,804
Asia(1)	21,200		—
Total assets	$	338,797	$	339,804

15. Leases

The components of lease expense consisted of the following for the three months ended March 31, 2023:


	Three Months Ended March 31, 2023
In thousands	Third Party		Related Party		Total
Finance lease costs:
Amortization of right-of-use assets	$	885	$	—	$	885
Interest on lease liabilities	88		—		88
Operating lease costs	716		98		814
Short-term lease costs	27		67		94
Variable lease costs	144		—		144
Sublease income	(129)		—		(129)
Total lease costs	$	1,731	$	165	$	1,896

Lease-related assets and liabilities recorded on the consolidated balance sheet are as follows:


	March 31, 2023						December 31, 2022
In thousands	Third Party		Related Party		Total		Third Party		Related Party		Total
Assets
Finance lease right-of-use assets (included in property and equipment, net)	$	5,546	$	—	$	5,546	$	5,916	$	—	$	5,916
Operating lease right-of-use assets	5,331		1,313		6,644		5,819		1,394		7,213
Total leased assets	$	10,877	$	1,313	$	12,190	$	11,735	$	1,394	$	13,129

Liabilities
Lease liabilities, current:
Finance lease liabilities	$	2,936	$	—	$	2,936	$	3,023	$	—	$	3,023
Operating lease liabilities	2,045		336		2,381		2,130		322		2,452
Lease liabilities, current	4,981		336		5,317		5,153		322		5,475

Lease liabilities, noncurrent:
Finance lease liabilities	2,813		—		2,813		2,976		—		2,976
Operating lease liabilities	4,235		1,002		5,237		4,672		1,093		5,765
Lease liabilities, noncurrent	7,048		1,002		8,050		7,648		1,093		8,741
Total leased liabilities	$	12,029	$	1,338	$	13,367	$	12,801	$	1,415	$	14,216

Accumulated amortization related to the finance lease assets was $4.8 million and $3.9 million as of March 31, 2023 and December 31, 2022, respectively.

The following table summarizes our lease term and discount rate assumptions as of March 31, 2023:


	March 31, 2023
	Third Party	Related Party	Total
Weighted-average remaining lease term (years):
Finance leases	1.94	—	1.94
Operating leases	3.47	3.67	3.50

Weighted-average discount rate:
Finance leases	6.3%	—	6.3%
Operating leases	6.8%	5.3%	6.5%

Undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancelable operating leases with terms of more than one year, as of March 31, 2023, have been reconciled to the total operating and finance lease liabilities recognized on the condensed consolidated balance sheets as of March 31, 2023 as follows:


	March 31, 2023
	Finance Leases						Operating Leases
In thousands	Third Party		Related Party		Total		Third Party		Related Party		Total
Remaining 2023	$	2,495	$	—	$	2,495	$	1,922	$	291	$	2,213
2024	2,526		—		2,526		1,930		421		2,351
2025	1,060		—		1,060		1,535		427		1,962
2026	—		—		—		1,029		323		1,352
2027	—		—		—		457		—		457
Thereafter	—		—		—		380		—		380
Total lease payments	6,081		—		6,081		7,253		1,462		8,715
Less: Interest	332		—		332		973		124		1,097
Present value of lease liabilities	$	5,749	$	—	$	5,749	$	6,280	$	1,338	$	7,618

Prior to the adoption of ASC 2016-02, Leases, the following was disclosed in our Quarterly Report on Form 10-Q for the three months ended March 31, 2022:

Total rent expense under related party and third-party agreements was approximately $0.2 million and $1.2 million, respectively, for the three months ended March 31, 2022.

Total sublease revenue under third-party agreements was approximately $0.2 million for the three months ended March 31, 2022.

During the three months ended March 31, 2022, we recorded additional lease abandonment expense totaling $0.1 million related to a termination fee we paid to exit an office lease.

16. Commitments and Contingencies

Commitments

Operating leases

See Note 15, Leases, for commitments related to our operating leases.

Contingencies

From time to time, we may be subjected to claims or lawsuits which arise in the ordinary course of business, including the previously disclosed tax matter (see Note 11, Income Taxes, for further information) and matters described below. Estimates for resolution of legal and other contingencies are accrued when losses are probable and reasonably estimable in accordance with ASC 450, Contingencies. Except as set forth below, in the opinion of management, after consulting with legal counsel, none of these other claims are currently expected to have a material adverse effect on our condensed consolidated results of operations, financial position or cash flows.

Advisory Services Agreement Dispute

We are in a services agreement dispute with a third-party advisory firm for fees due under the services agreement. The advisory firm claims $31.0 million, plus interest, is owed in fees. Based on consultation with legal counsel, we previously proposed a settlement in the amount of $8.0 million, which has been accrued for as of March 31, 2023 and December 31, 2022, and is included in accrued expenses in our unaudited condensed consolidated balance sheets. The amount of the ultimate loss may range from $8.0 million to $26.3 million.

Indemnification

17. Subsequent Events

In thousands June 30, 2022 December 31, 2021
Americas $ 446,243 481,705
Asia 73,968 87,602
Total assets $ 520,211 $ 569,307

~~16. Subsequent Events~~

Management has determined that no material events or transactions have occurred subsequent to the balance sheet date, other than those events noted below, that require disclosure in ~~the~~our unaudited condensed consolidated financial statements.

~~In July and August 2022, we granted a total~~Sale of ~~8,523,783 RSUs to new and existing employees under the 2021 EIP (see Note 11,~~ ~~Commitments and Contingencies~~).

Innovations Group

On ~~August 12, 2022, we entered into senior secured convertible note subscription agreements with certain institutional investors, pursuant to which~~February 26, 2023, we agreed to ~~issue and~~ sell ~~$67.5 million in aggregate principal amount~~100% of ~~a new series of variable rate convertible senior secured notes due December 15, 2025 (the “2025 Notes”) to holders~~the outstanding capital stock of our ~~6.25% convertible senior notes due June 15, 2026 (see Note 8,~~ ~~Debt~~wholly owned subsidiary, Innovations Group, Inc. (“Innovations Group”) in, to Belmar MidCo, Inc., a ~~private placement transaction, raising approximately $22.5~~Delaware corporation and a wholly owned subsidiary of Belmar Holdings, Inc., a Delaware corporation, a portfolio company of Webster Capital IV, L.P., a Delaware limited partnership, pursuant to a stock purchase agreement dated February 26, 2023. The sale closed on May 11, 2023 for gross proceeds of $56.0 million, in gross cash proceeds, after paying for a repurchase of $45.0 million of the 2026 Notes, which proceeds will be used in part to fully repay the seller notes. The 2025 Notes are convertible into shares of UpHealth common stock at a conversion price, subject to ~~the occurrence of certain corporate events, of $1.75 per share. The 2025 Notes will be senior secured obligations of UpHealth, secured by substantially all of our assets~~working capital, closing debt, and ~~those of our domestic subsidiaries,~~other adjustments. See Note 3, Assets and ~~will accrue interest at a rate equal to the daily secured overnight financing rate (“~~Liabilities Held for Sale~~SOFR~~”) plus 9.0% per annum, with a minimum rate of 10.5% per annum, payable quarterly in arrears. The 2025 Notes will mature on December 15, 2025, unless earlier repurchased, redeemed or converted. Holders will have the right to convert their 2025 Notes at any time. Upon the occurrence of certain corporate events, holders of the 2025 Notes can require UpHealth to repurchase, for cash all or part of their 2025 Notes in principal amounts of $1,000 or an integral multiple thereof at a repurchase price that will be equal to 105% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest thereon, if any. In the event that UpHealth sells assets with net proceeds in excess of $15.0 million, then it will make an offer to all holders of the 2025 Notes to repurchase the 2025 Notes for an aggregate amount of cash equal to 20.0% of the net proceeds of such asset sale, at a repurchase price per 2025 Note equal to 100.0% of the principal amount thereof, plus accrued and unpaid interest, if any. UpHealth may not otherwise seek to redeem the 2025 Notes prior to June 16, 2024. UpHealth will settle conversions solely in shares of its common stock, except for payments of cash in lieu of fractional shares.further information.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless otherwise indicated or the context otherwise requires, references in this report (this “Quarterly Report”) to “we,” “our,” “us,” “UpHealth” or the “Company” and other similar terms refer to UpHealth, Inc. and its consolidated subsidiaries. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with ~~the~~our unaudited condensed consolidated financial statements and the notes thereto contained elsewhere in this Quarterly Report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.

Special Note Regarding Forward-Looking Statements

This Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical fact included in this Quarterly Report including, without limitation, statements in this “~~Management’s~~“Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations~~”Operations” regarding the company’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as “expect,” “believe,” “anticipate,” “intend,” “estimate,” “seek,” “may,” “might,” “plan,” “possible,” “potential,” “should, “would” and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect management’s current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the ~~“Risk Factors~~”“Risk Factors” section in Part II, Item 1A. of this Quarterly Report, the “Risk Factors” section in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021~~2022 filed with the SEC on ~~April 18, 2022~~March 31, 2023 (our “~~Annual Report~~”“Annual Report”) and in any more recent filings with the SEC. The ~~company’s~~Company’s securities filings can be accessed on the EDGAR section of the SEC’s website at www.sec.gov. Except as expressly required by applicable securities law, the company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

UpHealth, Inc. Business Overview

~~UpHealth Services, Inc.~~

After undergoing a process launched in the second half of 2021 designed to help us determine how to tie the various components of the businesses brought together between November 2020 and June 2021 that we launched in the summer of 2021, in 2022, we turned to transforming our business strategy to create a company that can profitably fulfill our mission as an integrated whole. By considering our previous financial performance, we determined that it was ~~formed~~necessary for us to pivot and to focus on fewer investments for growth. As a result, we sought to establish a company that will deliver high-quality, predictable revenue streams, conserve cash and readjust our operating expenses, and improve operational excellence. This led us to make the following decisions with regard to our reporting segments:

•As a result of the previously disclosed ongoing control issues and legal proceedings with Glocal, we deconsolidated Glocal in July 2022. These issues and disputes are described in our Current Reports on Form 8-K filed with the SEC on October 3, 2022 and November ~~5, 2019,~~14, 2022, and ~~effectively began operations~~in our Quarterly Report on ~~January 1, 2020. It was formed~~Form 10-Q for the ~~purpose~~fiscal quarter ended September 30, 2022 filed with the SEC on December 29, 2022, as well as in Part II, Item 1, Legal Proceedings, of ~~effecting a combination~~this Quarterly Report. Accordingly, the financial results of ~~various companies engaged~~Glocal for the three months ended March 31, 2022 are included in ~~digital health, and commenced negotiations with a number~~the discussion of ~~companies, including those~~our financial results for the Virtual Care Infrastructure segment, but are excluded in the discussion for the three months ended March 31, 2023. As of March 31, 2023, the operations of Glocal remain deconsolidated from the rest of UpHealth as we continue to pursue all legal recourse against the founders of that ~~are discussed below as having been acquired.~~business.

•On February 26, 2023, UpHealth Holdings agreed to sell 100% of the outstanding capital stock of Innovations Group to Belmar MidCo, Inc., a Delaware corporation (“~~UpHealth Holdings~~”Belmar”) ~~became the sole shareholder~~and a wholly owned subsidiary of ~~UpHealth Services,~~Belmar Holdings, Inc. ~~through~~, a ~~reorganization with~~Delaware corporation, a portfolio company of Webster Capital IV, L.P., a Delaware limited partnership, pursuant to a stock purchase agreement, dated February 26, 2023, by and among UpHealth, ~~Services, Inc.’s original shareholders when~~ UpHealth Holdings, ~~was formed~~Innovations Group, and Belmar. The sale closed on ~~October 26, 2020~~May 11, 2023 for gross proceeds of $56.0 million, subject to working capital, closing debt, and other adjustments. The financial results of Innovations Group, which is classified as ~~a Delaware corporation. UpHealth Holdings then entered~~held-for-sale, are included in the discussion of our financial results for the Services segment for the three months ended March 31, 2023 and 2022.

•At the start of 2023, we made the decision to integrate BHS into ~~a series~~our legacy TTC operations and wind down our provider practice in Missouri. The financial results of ~~transactions to develop its~~BHS are included in the discussion of our financial results for the Services segment for the three months ended March 31, 2023 and 2022.

Following all of these changes, our reporting structure remains the same. We have three business ~~across three~~ segments: (a) Integrated Care ~~Management—through its subsidiary~~Management, which has evolved from the legacy Thrasys ~~Inc. (“Thrasys”);~~business; (b)~~Virtual Care Infrastructure—through its subsidiary Glocal Healthcare Systems Private Limited (“Glocal”); and (c) Services—through its subsidiaries Innovations Group, Inc. (“Innovations Group”), Behavioral Health Services, LLC (“BHS”) and TTC Healthcare, Inc. (“TTC”). On June 9, 2021, UpHealth (fka GigCapital2, Inc.) acquired UpHealth Holdings and its subsidiaries and Cloudbreak Health, LLC and its subsidiaries (“Cloudbreak”), which added Cloudbreak to the~~ Virtual Care Infrastructure, ~~segment.~~which uses MarttiTM, a platform developed by the legacy Cloudbreak business; and (c) Services, which is focused on behavioral health services using a platform created by the legacy TTC business.

Going forward, we will offer patient-centric digital health technologies and technology-enabled services to manage health and behavioral health across our strategic businesses. We are focused on integrating the value streams represented across these three product and service lines, and focusing on building more data and analytics capabilities to complement our technology. Additionally, we are working on a partnership to incorporate artificial intelligence (“AI”) into our core product offerings.

Integrated Care Management Segment ~~- Thrasys~~

~~Thrasys~~ Overview

~~Thrasys provides its customers with an advanced, comprehensive,~~

Integrated Care Management is a healthcare technology business that serves organizations that pay for healthcare, including health plans and ~~extensible technology platform, marketed under~~state, federal and municipal agencies that ensure the ~~umbrella “~~people they sponsor receive high-quality care, administered and delivered efficiently and effectively, all while driving health equity so that every individual, family, and community has access to the care they need.

The Integrated Care Management business is powered by the SyntraNetTM,” technology platform and applications. SyntraNetTM is a configurable integrated health management platform that enables clinical and community-based care teams to share information, coordinate care, manage utilization, and improve health ~~quality of care,~~outcomes and costs for individuals and populations— especially ~~for~~ individuals with complex medical, behavioral health, and social needs. ~~Thrasys focuses on both the United States and international markets. SyntraNet~~TM ~~is offered as a software-as-a-service (“SaaS”) platform. Information, analytics, and applications are delivered to care team members on desktops, tablets, and phones, as needed. An advanced protected health information (“PHI~~”) framework controls access to information based on roles, rights, policies, and scope of consent. The platform includes innovations in a number of areas: application and information models for connected care communities (an extension of multi-tenant architectures), integration and normalization of heterogeneous data sources, configurable software services and open application programming interfaces (“~~APIs”), advanced analytics and intelligence, scalable workflows and rules, protected health information management, and user interfaces ready for the proliferation of device types and interaction modes.~~

~~Thrasys Key Business Metrics~~SyntraNetTM creates virtual “care communities” – logical networks of organizations, care managers and service providers – that function as an integrated care team to deploy programs to improve health, quality, performance, efficiency, and costs.

~~Revenue~~Core features of the platform include the ability to:

~~Thrasys~~

• Create virtual, cross-sector care communities;

• Integrate and organize information from a wide range of health and social health data sources;

• Gain insight into health, risks, and opportunities with advanced analytics;

• Qualify and enroll groups into programs;

• Coordinate care teams across the continuum of care; and

• Analyze and report on various measures of success.

Our Integrated Care Management platform provides health plans and provider groups the ability to manage health with new value-based models of care. Our clients include the largest public health plan in the United States, entities that are part of the nation’s most comprehensive “whole person care” initiatives, and one of the fastest growing value-based pharmacy benefit managers.

Integrated Care sells its products primarily through its direct sales force, strategic collaborations and external producers in two key areas: payors including health plans and third-party administrators and public entities including state and local health care agencies. Revenues are derived from license fees, recurring subscription fees, and professional services for implementation.

Components of Results of Operations

Revenues

Integrated Care Management derives ~~revenue~~revenues broadly from the sales of (a) products—with associated license, subscription, and hosting fees and (b) services—largely to implement, configure, and extend the technology, and train and on-board users on the use of the platform and applications.

Licenses and Subscriptions ~~Revenue~~Revenues. License revenues are typically associated with rights granted to customers to deploy the platform to a certain number of care communities of a certain size, usually measured as the total population of patients that can be included within a care community. License revenues are recognized based on the nature of the license provided, either fully on the date license rights are granted to the customer if there are no further performance obligations or ratably over the license term beginning on the effective date of each contract, the date the customer takes possession of the license rights.

Subscription fees are recurring fees charged for access to the platform and applications. Subscription fees are typically pegged to a measure of use, such as population size, number of providers, members enrolled in programs, or number of members managed by applications. Subscription fees can grow as customers subscribe to additional application features or launch additional programs. Revenues from subscription fees are recognized ratably over the subscription term.

Services. The majority of ~~Thrasys’~~Integrated Care Management’s contracts to provide professional services are priced ~~either~~ on a time and materials basis, whereby revenues are recognized as the services are ~~rendered, or as a fixed monthly retainer based on an estimate of the number of hours of work over the contract term, whereby revenues are recognized on a straight-line basis over the contract term.~~rendered. In some cases, ~~Thrasys~~Integrated Care Management enters into professional

services contracts where professional services fees are defined for specific milestones, whereby revenues are recognized upon achievement of the milestones.

Cost of ~~Goods and Services~~Revenues

Cost of ~~goods and services~~revenues for ~~Thrasys~~Integrated Care Management include: costs related to hosting SyntraNetTM in a HIPAA-compliant cloud environment; costs of third-party product licenses embedded with SyntraNetTM; costs of a core professional services ~~team, amortization of capitalized internal-use software development costs,~~team; and an allocation of facilities, information technology, and depreciation costs. Added compliance requirements for security infrastructure is likely to add some additional costs for hosting services. ~~Thrasys~~Integrated Care Management also anticipates added costs for third-party licenses that will be added as the scope and footprint of the technology platform expands.

Hosting Infrastructure. ~~Thrasys’~~Integrated Care Management’s technology and solutions are designed to be agnostic to any particular cloud services provider. Currently, customer environments are hosted through contracts with two cloud service providers. ~~Thrasys~~

Integrated Care Management anticipates capabilities of cloud service providers to grow, and costs to become increasingly competitive, and will continue to evaluate offerings in the marketplace to determine the optimum mix of security, reliability, scalability, and performance to meet customer needs. Hosting infrastructure costs for ~~Thrasys~~Integrated Care Management are related to the number and size of environments deployed for customers and also on the service level agreements (“~~SLAs~~”SLAs”) negotiated with customers. As the average size of customers continues to grow, hosting infrastructure costs are expected to grow as a percentage of revenue.

Third-Party Product Licenses. ~~SyntraNetTM~~SyntraNetTM embeds certain third-party technology components to support some of its technology capabilities. There are multiple vendors for these components, and ~~Thrasys~~Integrated Care Management is not dependent on any specific vendor.

Professional Services Team. ~~Thrasys’~~Integrated Care Management’s professional services team works closely with the product team and is best understood as an “A-team” created to lead showcase implementations. The goal is to keep the professional services team small in order to focus it on deploying reference customers and facilitating the on-boarding and coaching of systems integration partners.

Operating Expenses

Sales and Marketing (“S&M”) Expenses. S&M expenses include an internal sales and marketing team and contracts with business development consultants to generate and qualify leads, and an allocation of facilities, information technology, and depreciation costs.

Research and Development (“R&D”) Expenses. ~~Thrasys~~Integrated Care Management continues to invest in R&D. The core R&D team consists of a small team of very experienced software developers. Beginning in 2019, Thrasys added considerable capacity via a consulting group with whom it has been working for over ten years. The team, based in Chicago, functioned much like the Thrasys internal team, until they were brought in-house in June 2021. R&D expenses attributed to internal-use software development are capitalized and amortized to cost of goods and services. R&D expenses also ~~include~~includes an allocation of facilities, information technology, and depreciation costs.

General and Administrative (“G&A”) Expenses. G&A expenses include compensation and benefits expense, and other administrative costs, related to its executive, finance, human resources, legal, facilities, and information technology teams, net of allocations to cost of ~~goods and services,~~revenues, S&M expenses, and R&D expenses.

Depreciation and Amortization Expenses. Depreciation expense relates to the depreciation of computer equipment, purchased software, furniture and fixtures, and office equipment, net of amounts allocated to cost of ~~goods and services.~~revenues. Amortization expense relates to the amortization of intangible assets from the acquisition of Thrasys.

Virtual Care Infrastructure Segment ~~- Glocal and Cloudbreak~~

~~Glocal~~ Overview

~~Glocal~~Virtual Care Infrastructure is a technology and ~~process-based~~technology-enabled services business that connects healthcare ~~platform providing its customer comprehensive primary~~systems with platforms, analytics and services that make clinical and administrative processes simpler and more efficient. Hospital systems, physicians, and patients depend on us to help them improve performance, reduce costs and advance care ~~and specialty consultations for a fraction of the cost of traditional healthcare delivery systems,~~quality through ~~telemedicine, digital dispensaries, and technology-based hospital centers. Glocal has been awarded by the United Nation’s (“~~UN~~”) Innovation Exchange with the Public Appreciation Award 2020 as a cutting-edge technology to meet the sustainable development goals of the UN.~~

~~Glocal pioneered the development of a semantic algorithm and AI-based~~technology-enabled services built directly into clinical decision support system called LitmusDX, which helps deliver healthcare through telemedicine in its HelloLyf CX digital dispensaries and HelloLyf HX digital hospital, utilizing a telemedicine terminal called LitmusMX and an automated medicine dispenser called LitmusRX.workflows.

~~LitmusMX~~Virtual Care Infrastructure is ~~used for recording the vitals of the patient, consultations with~~ a doctor over video conferencing from miles away, and routine card-based point-of-care tests, and also contains a fully automatic biochemistry analyzer. The software may also suggest further investigations. If the doctor agrees, they can order further rapid tests, such as for dengue or malaria, for which kits are available. When the doctor selects a prescription, LitmusMX talks to the LitmusRX automated medicine dispensing unit, which delivers the required dosages of the medicines. Theoretically, the algorithm can be fine-tuned to arrive at a final diagnosis and prescription on its own. In addition to these solutions is one of the world’s top end-to-end Clinical Decision Support System (“~~CDSS~~”), named LitmusDX, along with a web interface, named HelloLyf, which integrates practice management with diagnostic algorithms, investigation interpretation, treatment protocols, drug safety checks, and electronic medical records.

Glocal’s HelloLyf CX digital dispensary was selected by United Nations AID as a cutting-edge technology solution to reach the UN’s sustainable development goals. Unlike other telemedicine centers seen today, Glocal’s HelloLyf CX digital dispensary is an innovative, hybrid, brick-and-mortar center, which provides complete primary and emergency healthcare solutions, such as consultation, confirmatory tests, and medicines, from a single point through the use of LitmusMX and LitmusRX. During the COVID-19 pandemic, Glocal’s innovative HelloLyf CX digital dispensaries successfully used ultraviolet C light disinfection, acrylic separation, and positive air pressure to create the first line for defense of health workers and patients against all forms of infectious and contagious diseases, including COVID-19.

In September 2021, Glocal delivered its first digital hospital in the Indian state of Nagaland, providing 88 e-ICU beds with connected ventilators and injection syringe pump. This digital hospital utilizes Glocal’s HelloLyf patient management, digital health, and decision support software to provide and coordinate outpatient care, emergency care, radiology and imaging, intensive care, high-dependency care, inpatient care, and dialysis.

While Glocal’s customers are located in regions in India and Southeast Asia, Glocal generates the majority of its revenue in India. Glocal’s telemedicine/HelloLyf CX digital dispensaries have been functional in India mainly through the government and are primarily housed in government facilities, which provide services that are free to the beneficiaries. After successful implementation of projects in the Indian states of Rajasthan, Odisha, and West Bengal, Glocal won a contract to set-up 550+ HelloLyf CX digital dispensaries in the Indian State of Madhya Pradesh, resulting in a total of 750+ government-placed nodes across India.

~~Glocal has begun focusing on a business-to-business (“B2B”) model where the HelloLyf CX digital dispensaries are sold to B2B partners/customers, who operate them with a revenue-share to Glocal. This results in lower revenues but higher margins.~~

~~Glocal also owns nine hospitals, four of which it operates and five of which it has contracted with third parties to operate with Glocal receiving a revenue-share.~~

~~Glocal Key Business Metrics~~

~~Revenue~~

~~Services. Services revenue is generated primarily from operating hospitals and clinics, including pharmacy and medicine sales, and transaction fees per telemedicine consultation.~~

~~Products. Products revenue is generated primarily from the sale of HelloLyf CX digital dispensaries and the construction of HelloLyf HX digital hospitals.~~

~~Cost of Goods and Services~~

Cost of goods and services consists primarily of costs of building and operating hospitals, including costs for the purchase of medicines, professional/doctor fees, the cost to build HelloLyf CX digital dispensaries and HelloLyf HX digital hospitals, and an allocation of information technology and depreciation costs.

~~Operating Expenses~~

~~Sales and Marketing Expenses~~. S&M expenses are comprised of compensation and benefits related to Glocal’s sales personnel, travel expenses, and expenses related to advertising, marketing programs, and events, and an allocation of facilities, information technology, and depreciation costs.

~~General and Administrative Expenses~~. G&A expenses include compensation and benefits expense, and other administrative costs, related to its executive, finance, human resources, legal, facilities, and information technology teams, net of allocations to cost of goods and services and S&M expenses.

~~Depreciation and Amortization Expenses~~. Glocal’s operations are capital intensive. Depreciation expense relates to the depreciation of buildings, computer equipment, purchased software, furniture and fixtures, and office equipment, net of amounts allocated to cost of goods and services. Amortization expense relates to the amortization of intangible assets from the acquisition of Glocal.

~~Cloudbreak Overview~~

~~Cloudbreak is a leading~~ provider of unified ~~telemedicine~~telehealth solutions and digital health tools aimed at increasing access to healthcare and resolving health disparities across the care ~~continuum,~~continuum. Virtual Care Infrastructure solely consists of the U.S. Telehealth business, which has one of the largest installed user bases in the nation, performing more than 300,000 encounters per month on over 40,000 video endpoints at ~~each stage of~~over 2,800 healthcare ~~acuity. Cloudbreak powers~~venues in over 250 languages across the United States. Through its ~~client’s healthcare~~integrated telehealth and language access services, the Martti™ platform serves as the digital ~~transformation initiatives and~~front door to in-hospital care. The MarttiTM platform provides digital health infrastructure enabling its partners to ~~address healthcare disparities and~~ implement unique, private-label telehealth strategies customized to their specific needs and ~~markets.~~markets, with language access built-in.

~~Cloudbreak’s core offering, known as Martti™, is a video remote interpreting solution that puts qualified and certified medical interpreters at~~

In 2022, the ~~fingertips of clinical care teams nationwide through Cloudbreak’s proprietary software platform. Having one of the largest installed bases of video endpoints in the nation, Cloudbreak has~~U.S. Telehealth business expanded its operations by leveraging its existing platform to include other telemedicine use cases such as ~~well, including tele-stroke, tele-psychiatry, tele-urology,~~telestroke, teleneurology, and ~~tele-quarantine, among others, all over the same infrastructure.Cloudbreak has~~telepsychiatry. We also ~~recently~~ launched a home health virtual visit platform enabling ~~its~~ healthcare system partners to see their patients remotely on any device, at ~~anytime,~~any time, anywhere the patient may be, and in any language they may speak. ~~Cloudbreak’s~~

The U.S. Telehealth’s products and services are sold primarily through a direct sales force. The U.S. Telehealth’s products are also supported and distributed through an array of alliances and business partnerships with other technology vendors, who integrate and interface our products with their applications. The U.S. Telehealth's business offers an expanding suite of telehealth use cases, which are delivered under multi-year contracts that include fixed minimums with upside attributable to usage-based fees. Our client base ~~spans the entire healthcare continuum including~~includes hospitals and health systems, ~~Federally Qualified Healthcare Clinics,~~federally qualified healthcare clinics (“FQHCs”), urgent care centers, stand-alone clinics, and medical ~~practices, employers,~~practices.

As discussed in Note 1, Organization and ~~schools.~~Business, in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report, we deconsolidated Glocal during the three months ended September 30, 2022. Accordingly, the financial results of Glocal for the three months ended March 31, 2022 are included in our unaudited condensed consolidated financial statements, and the financial position of Glocal as of March 31, 2023 and the financial results of Glocal for the three months then ended are not included in our unaudited condensed consolidated financial statements.

~~Cloudbreak’s Telemedicine-as-a-Service (“TaaS~~”) business model aligns interests between Cloudbreak and its clients, creating a partnership targeted towards forming long-term agreements with sustainable and mutually beneficial growth models for all stakeholders. Cloudbreak has specifically structured itself to not have a captive medical group as it believes that creates a conflictComponents of interest with its client base, as local health systems do not want to suffer patient leakage to a technology partner or be forced to use a provider network. As a result, Cloudbreak has the freedom to match its partners with centersResults of excellence on its network, who can satisfy their specific needs and strategy without fear of competing for the patient’s attention, and thereby avoid the employment and maintenance of a medical group, which is a lower margin and a more labor intensive activity.Operations

~~Cloudbreak Key Business Metrics~~

~~Revenue~~Revenues

Services. Services ~~revenue is~~revenues are generated primarily from the sale of subscription-based fixed monthly minute and variable rate per unit of service medical language interpretation services. ~~Cloudbreak~~Our U.S. Telehealth business also records ancillary ~~revenue~~revenues from the rental of Martti™ devices and from the provision of information technology services that include connectivity and ongoing support of the Martti™ software platform. Generally, ~~Cloudbreak’s~~U.S. Telehealth’s medical language interpretation and information technology services are invoiced monthly. Fixed monthly minute medical language interpretation subscription and information technology services fees are invoiced in advance in the period preceding the service. Variable rate per unit medical language interpretation and information technology services fees (including overage fees related to minutes used by the customer in excess of the fixed monthly minute subscription) are invoiced monthly in arrears. Martti™ device leases are invoiced monthly in advance in the period preceding the usage. Invoiced amounts are typically due within 30 days of the invoice date. For the period from March 26, 2021 through June 30, 2022, services revenues also included revenues from Glocal, which were generated primarily from operating hospitals and clinics, including pharmacy and medicine sales, and transaction fees per telemedicine consultation.

Products. Products ~~revenue consists~~revenues consist of the sale of Martti™ devices to its customers. Sale of Martti™ devices are generally invoiced at contract execution (50%) and upon the delivery of the devices to the customer (50%). Invoiced amounts are typically due within 30 days of the invoice date. For the period from March 26, 2021 through June 30, 2022, products revenues also included revenues from Glocal, which were generated primarily from the sale of HelloLyf CX digital dispensaries and the construction of HelloLyf HX digital hospitals.

Cost of ~~Goods and Services~~Revenues

Cost of ~~goods and services~~revenues primarily ~~consists~~consist of costs related to supporting and hosting ~~Cloudbreak’s~~U.S. Telehealth’s product offerings and delivering services, and include the cost of maintaining ~~Cloudbreak’s~~U.S. Telehealth’s data centers, customer support team, and ~~Cloudbreak’s~~U.S. Telehealth’s professional services staff, in

addition to third-party service provider costs such as data center and networking expenses, amortization of capitalized ~~internal-use~~ software development costs, the cost of purchased equipment inventory sold to customers, and an allocation of facilities, information technology, and depreciation costs. For the period from March 26, 2021 through June 30, 2022, cost of revenues also included cost of revenues from Glocal, which primarily consisted of costs of building and operating hospitals, including costs for the purchase of medicines, professional/doctor fees, the cost to build HelloLyf CX digital dispensaries and HelloLyf HX digital hospitals, and an allocation of information technology and depreciation costs.

Operating Expenses

Sales and Marketing Expenses. S&M expenses consist of compensation and benefits, costs related to advertising, marketing programs, and events, ~~including related wages, commissions and travel expenses,~~ and an allocation of facilities, information technology, and depreciation costs.

General and Administrative ~~Expenses~~.Expenses. G&A expenses consist of compensation and benefits expense, and other administrative costs, related to its executive, finance, human resources, legal, facilities, and information technology teams, net of allocations to cost of ~~goods and services~~revenues and S&M.

Services Segment ~~- Innovations Group, TTC and BHS~~

~~Innovations Group~~ Overview

~~Innovations Group~~Our Services segment provides behavioral health and pharmacy services in the United States, which are critically important to managing whole person care and its associated costs. Our comprehensive behavioral health capabilities are powered by UpHealth BehavioralTM and provide evidence-based and tech-enabled behavioral health and substance abuse services via onsite care delivery and telehealth. Our Services platform is working to deliver an increasing volume of services, including telehealth services, to existing customers, as well as clients belonging to the ~~parent company of the following wholly-owned operating subsidiaries: MedQuest Pharmacy, Inc. (“MedQuest Pharmacy”), WorldLink Medical, Inc (“WorldLink Medical”), Medical Horizons, Inc. (“Medical Horizons”),~~Integrated Care Management and ~~Pinnacle Labs, Inc. (doing business as MedQuest Testing Services (“MTS”)).~~Virtual Care Infrastructure platforms.

UpHealth BehavioralTM provides comprehensive patient-centered care, addressing the physical, mental, and social well-being of our clients. We engage people in the most appropriate care settings, including clinical sites, out-patient and virtual. UpHealth BehavioralTM delivers behavioral health services; helps patients and providers navigate and address complex, chronic behavioral health needs; offers post-acute care planning services; and serves consumers and care providers through advanced, on-demand digital health technologies, such as telehealth. UpHealth BehavioralTM works directly with consumers, care delivery systems, providers, payors, and public-sector entities to provide high quality, accessible and equitable care with improved health outcomes and reduced total cost of care.

UpHealth BehavioralTM sells its products primarily through its direct sales force, and strategic collaborations in two key areas: payors including health plans, third-party administrators; and public entities including the U.S. Departments of Veterans Affairs and other federal, state, and local health care agencies.

Our Pharmacy business, Innovations Group, is powered by MedQuest Pharmacy, is a full-service retail and compounding pharmacy licensed in all 50 U.S. states and the District of Columbia that ~~has relationships with both prescribers and patients,~~ dispenses ~~patient-specific~~prescribed medications ~~and ships~~shipped directly to patients. The business model is driven by cash-pay and prescription volume-based revenue generated by physician electronic prescription order entry, as well as traditional prescriber-patient-pharmacist interactions, mailed, verbal, and faxed orders. It ~~delivers both compounded and legend (also referred to as manufactured) drugs and~~ is capable of serving as a retail or national fulfillment ~~center,~~center. Other services and products are also available, such as ~~a personalized medication administration partner with prescribers,~~lab and ~~as a lifestyle wellness direct-to-consumer offering. Its proprietary software~~testing services, nutritional supplements, and ~~operating system, eMedplus, is Electronic Prescribing of Controlled Substances (“EPCS”) certified by the U.S. Drug Enforcement Administration (“DEA~~”)education and provides prescribers with a full-service prescription management system. In January 2020, eMedplus became SureScripts certified (SureScript’s process is to validate that the software meets certain industry standards related to sending and receiving electronic messages and that it is providing open choicetraining for ~~medication selection and dispensing location), allowing any user of the SureScripts platform to prescribe medications dispensed by MedQuest Pharmacy.~~medical practitioners.

~~MedQuest Pharmacy~~On February 26, 2023, UpHealth Holdings agreed to sell 100% of the outstanding capital stock of Innovations Group. The sale closed on May 11, 2023. The financial results of Innovations Group, which is ~~accredited~~classified as held-for-sale, are included in the discussion of our financial results for the Services segment for the three months ended March 31, 2023 and recognized by the Accreditation Commission for Health Care and its Pharmacy Compounding Accreditation Board, among other high-quality providers and suppliers. MedQuest Pharmacy has achieved this elite level of quality by exceeding standards set by national accreditation bodies and quality-centered organizations.2022.

~~MedQuest Pharmacy is currently working on expanding its prescriber base, through both current prescribers~~Additionally, at the start of 2023, we made the decision to integrate BHS into our legacy TTC operations and ~~new prescribers, through~~wind down our provider practice in Missouri. The financial results of BHS are included in the ~~SureScripts platform~~discussion of our financial results for the Services segment for the three months ended March 31, 2023 and testing services with new and existing lab companies and relationships. Medical Horizons is also expanding their sales of supplements through the new NutraScriptives-Direct program, which allows physicians and others to use the NutraScriptives-Direct program to service their patients’ needs and thus expand their services and provide growth opportunities for their practices.2022.

~~Also under the Innovations Group suite~~Components of ~~services is WorldLink Medical, Medical Horizons, and MedQuest Testing Services. WorldLink Medical is the educational services arm~~Results of ~~Innovations Group, providing Continuing Medical Education (“CME”) educational courses accredited as a joint provider through the Accreditation Council for Continuing Medical Education (“ACCME~~”). Medical Horizons specializes in customized formulations and contract dietary supplement and nutraceuticals manufacturing as an own label distributor with its brand NUTRAscriptivesTM, as well as other brands. Its turnkey solutions include label design, printing, and application; custom packaging; daily packs; a selection of capsule sizes and colors; and convenient auto-reorder services. It features a staff of experts that is committed to excellence and outstanding customer service. MedQuest Testing Services focuses specifically on facilitating diagnostic testing between lab companies, such as LabCorp and Quest Diagnostics, patients, and providers.Operations

~~Innovations Group Key Business Metrics~~

~~Revenue~~

~~Products~~. Products revenue is generated primarily from the sale of prescription medications directly to patients, as well as through the sale of supplemental products to providers. The majority of the customer revenue is billed and collected before the medications and products are shipped from the facility. MedQuest Pharmacy is Innovation’s largest subsidiary in terms of revenue and generates approximately 60% of its revenue from sales of compounded medications and approximately 40% of its revenue from sales of manufactured medications and supplements.Revenues

Services. Services ~~revenue is~~revenues at UpHealth BehavioralTM are generated ~~primarily from CME educational courses provided by WorldLink Medical.~~

~~Cost of Goods and Services~~

Cost of goods and services primarily consists of costs of raw ingredients and materials to compound various drugs and supplements, the cost of manufactured product purchased directly from the distributors for resale, the cost of fulfillment and shipping services, amortization of capitalized internal-use software development costs, and an allocation of facilities, information technology, and depreciation costs. MedQuest Pharmacy purchases these items through a large industry distributor with many suppliers and also sources products and supplies directly with manufacturers. MedQuest Pharmacy is also able to leverage the size of its operations to purchase larger quantities of certain ingredients and materials at lower prices.

~~Operating Expenses~~

~~Sales and Marketing Expenses~~. S&M expenses consist of costs related to advertising, marketing programs, and events including related wages, commissions and travel expenses, an allocation of facilities, information technology, and depreciation costs.

~~Depreciation and Amortization Expenses~~. Depreciation expense relates to the depreciation of computer equipment, lab equipment, purchased software, furniture and fixtures, office equipment, and leasehold improvements, net of amounts allocated to cost of goods and services. Amortization expense relates to the amortization of intangible assets from the acquisition of Innovations Group.

~~TTC Overview~~

TTC provides inpatient and outpatient mental health and substance abuse treatment services for individuals with behavioral health issues, including post-traumatic stress disorder and drug and alcohol addiction. TTC offers a complete continuum of care from its detoxification services, residential care, partial hospitalization programs, and intensive outpatient, and outpatient programs. During the COVID-19 pandemic, outpatient programs have been virtual for a majority of visits.

In March 2020, TTC formed Transformations Mending Fences, LLC to provide mental health and substance abuse disorder treatment, including equine therapy, to patients. TTC has an 80% controlling interest in the entity with the remaining 20% interest owned by an unrelated party. Operations began in December 2020, with the admission of the first patient occurring in January 2021.

In addition to inpatient and outpatient substance abuse treatment services, TTC performs screenings, urinalysis, and diagnostic laboratory services, and provides physician services to clients. TTC operates three subsidiaries located in Delray Beach, Florida and one facility in Morriston, Florida. These facilities consist of inpatient substance abuse treatment facilities, standalone outpatient centers, and sober living facilities focused on delivering effective clinical care and treatment solutions.

~~TTC Key Business Metrics~~

~~Revenue~~

~~Services. TTC generates revenue~~ primarily through services provided to clients in both inpatient and outpatient treatment settings. ~~TTC~~UpHealth BehavioralTM bills third-party payors weekly for the services provided in the prior week. Client-related ~~services,~~revenues, such as inpatient and outpatient programs, are generally recognized over time as the performance obligation is satisfied at the estimated net realizable value amount from clients, third-party payors, and others for services provided. ~~TTC~~UpHealth BehavioralTM receives the majority of payments from commercial payors at out-of-network rates. Client service ~~revenue is~~revenues are recorded at established billing rates, less adjustments to estimate net realizable value. Provisions for estimated third party payor reimbursements are provided in the period related services are rendered and adjusted in future periods when actual reimbursements are received. A significant or sustained decrease in reimbursement rates could have a material adverse effect on operating results.

~~Laboratory Testing~~UpHealth Behavioral~~. TTC~~TM also provides diagnostic laboratory testing services for its clients, which are recognized over time as the performance obligation is satisfied at the estimated net realizable value amount from clients, third-party payors, and others for services provided. Diagnostic laboratory service ~~revenue is~~revenues are recorded at established billing rates, less adjustments to estimate net realizable value. Provisions for estimated third party payor reimbursements are provided in the period related services are rendered and adjusted in future periods when actual reimbursements are received.

~~Cost of Goods and~~ Services

~~Cost of goods and services consists primarily of the costs of operating the facilities, professional/doctor fees, and an allocation of information technology and depreciation costs.~~

~~Operating Expenses~~

~~Sales and Marketing Expenses~~ revenues at UpHealth Behavioral~~. S&M expenses consist of costs related to advertising, marketing programs, and events.~~

~~General and Administrative Expenses~~TM. G&A expenses include compensation and benefits expense, and other administrative costs, related to its executive, finance, human resources, legal, facilities, and information technology teams, net of allocations to cost of goods and services and S&M expenses.

~~Depreciation and Amortization Expenses~~. Depreciation expense relates to the depreciation of computer equipment, purchased software, furniture and fixtures, office equipment, and leasehold improvements, net of amounts allocated to cost of goods and services. Amortization expense relates to the amortization of intangible assets from the acquisition of TTC.

~~BHS Overview~~

BHS operates through Psych Care Consultants, LLC, BHS Pharmacy, LLC, and Reimbursement Solutions, LLC, wholly-owned subsidiaries of BHS. Psych Care Consultants, LLC is a medical group that has four medical offices located in the St. Louis Metropolitan area (Missouri) and provides psychiatric and mental health services. BHS Pharmacy, LLC provides retail pharmacy services specializing in behavioral health through services, such as medication management, screenings, online portals, and delivery. Reimbursement Solutions, LLC provides billing services for Psych Care Consultants, LLC (which has allowed for more efficient payment for BHS clinicians) and third-party customers. Services include billings, collections, verification of benefits, authorization, and credentialing.

BHS provides its patients and providers with a reliable platform where a provider can address their patients’ needs efficiently with an infrastructure built to support the providers and address patient needs. This infrastructure consists of medical offices placed strategically for the convenience of providers and patients and trained staff to assist providers and patients in the delivery of quality health services that is timely and efficient, provide prescription dispensing for patients that is convenient to maintain compliance, and assist providers with billing and collection services through Reimbursement Solutions, LLC.

~~BHS providers work in collaboration with multiple area hospital systems (both in leadership and clinical positions) to provide and direct inpatient treatment. BHS’ business is~~ are also generated by various referral sources developed over the years by BHS’ providers and their presence in the market for over twenty-five years. BHS offers in-office, virtual, and in-patient treatment. Common conditions treated by BHS practitioners include depression, bipolar disorder, attention disorders, schizophrenia, substance use disorders, post-traumatic stress disorder, Alzheimer’s disease and related disorders, and personality disorders.

~~BHS Key Business Metrics~~

~~Revenue~~

~~Services. Services revenue is generated primarily~~ by providing psychiatric and mental health services and billing services. Although the underlying tasks will vary by service and by patient, medical professionals perform inquiries, obtain vital statistics, perform certain lab tests, administer therapy, and provide any additional goods and services as necessary depending on the information obtained. In addition, services revenues are generated from CME educational courses.

Products. Products ~~revenue is~~revenues through our Pharmacy business are generated primarily from the sale of prescription medications directly to patients, as well as through the sale of supplemental products to providers. The majority of the customer revenues are billed and collected

before the medications and products are shipped from the facility. The Pharmacy business generates approximately 60% of its revenue from sales of compounded medications and approximately 40% of its revenue from sales of manufactured medications and supplements.

Products revenues are also generated by providing retail pharmacy services ~~through BHS Pharmacy, LLC.~~at UpHealth BehavioralTM.

Cost of ~~Goods and Services~~Revenues

Cost of ~~goods and services consists~~revenues at UpHealth BehavioralTM consist primarily of provider compensation expenses, the cost of pharmaceutical medications sold to patients, the cost of operating the facilities, professional/medical fees, and an allocation of facilities, information technology, and depreciation costs. Provider compensation expenses include consulting payments to ~~BHS’~~ healthcare providers, including medical doctors in psychiatry, psychologists, nurse practitioners, and clinical social workers. ~~BHS~~UpHealth BehavioralTM has adopted an incentive-based compensation plan with provider agreements that compensate the providers based upon a percentage of

revenue generated and ultimately collected for services provided. ~~BHS~~UpHealth BehavioralTM primarily purchases pharmaceutical medications through a large industry distributor with many suppliers, but also purchases some directly from other suppliers.

Cost of revenues at the Pharmacy business primarily consist of costs of raw ingredients and materials to compound various drugs and supplements, the cost of manufactured product purchased directly from the distributors for resale, the cost of fulfillment and shipping services and an allocation of facilities, information technology, and depreciation costs. The Pharmacy business purchases these items through a large industry distributor with many suppliers and also sources products and supplies directly with manufacturers. The Pharmacy business is also able to leverage the size of its operations to purchase larger quantities of certain ingredients and materials at lower prices.

Operating Expenses

Sales and Marketing Expenses. S&M expenses consist of cost related to compensation and benefits, advertising and marketing programs, events, fees paid to third party marketing firms, and an allocation of facilities, information technology, and depreciation cost.

General and Administrative Expenses. G&A expenses include compensation and benefits expense, and other administrative costs, related to its executive, finance, human resources, legal, facilities, and information technology teams, net of allocations to cost of ~~goods~~revenues and ~~services.~~S&M expenses.

Depreciation ~~Expense~~and Amortization Expenses. Depreciation expense relates to the depreciation of computer equipment, purchased software, furniture and fixtures, ~~and~~ office equipment, and leasehold improvements, net of amounts allocated to cost of ~~goods and services.~~revenues. Amortization expense relates to the amortization of intangible assets from the ~~acquisition~~acquisitions of ~~BHS.~~TTC, BHS, and Innovations Group.

UpHealth, Inc. Consolidated Results of Operations

Operating Results

As discussed in Note 1, Organization and Business, in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report, we deconsolidated Glocal during the three months ended September 30, 2022. Accordingly, the financial results of Glocal for the three months ended March 31, 2022 are included in the discussion of our financial results for the Virtual Care Infrastructure segment for the three months ended March 31, 2022, but are excluded in the discussion for the three months ended March 31, 2023.

The following table sets forth our consolidated results of operations:


(Unaudited, in thousands)	Three Months Ended March 31,
	2023		2022		$ Change		% Change
Revenues:
Services	$	30,941	$	25,686	$	5,255	20	%
Licenses and subscriptions	1,936		1,781		155		9	%
Products	9,268		8,505		763		9	%
Total revenues	42,145		35,972		6,173		17	%
Costs of revenues:
Services	13,744		15,758		(2,014)		(13)	%
License and subscriptions	319		233		86		37	%
Products	5,406		5,990		(584)		(10)	%
Total costs of revenues	19,469		21,981		(2,512)		(11)	%
Gross profit	22,676		13,991		8,685		62	%
Operating expenses:
Sales and marketing	4,619		3,434		1,185		35	%
Research and development	1,285		1,758		(473)		(27)	%
General and administrative	11,009		11,467		(458)		(4)	%
Depreciation and amortization	1,611		5,236		(3,625)		(69)	%
Stock-based compensation	989		1,374		(385)		(28)	%
Lease abandonment expenses	—		75		(75)		(100)	%
Goodwill and intangible asset impairment	495		6,174		(5,679)		(92)	%
Acquisition, integration, and transformation costs	3,446		2,384		1,062		45	%
Total operating expenses	23,454		31,902		(8,448)		(26)	%
Loss from operations	(778)		(17,911)		17,133		(96)	%
Other expense:
Interest expense	(6,858)		(6,995)		137		(2)	%
Gain on fair value of derivative liability	26		4,829		(4,803)		(99)	%
Gain (loss) on fair value of warrant liabilities	(8)		95		(103)		(108)	%
Other expense, net, including interest income	(17)		(16)		(1)		6	%
Total other expense	(6,857)		(2,087)		(4,770)		229	%
Loss before income tax benefit	(7,635)		(19,998)		12,363		(62)	%
Income tax benefit	—		2,293		(2,293)		(100)	%
Net loss	(7,635)		(17,705)		10,070		(57)	%
Less: net income (loss) attributable to noncontrolling interests	448		(260)		708		(272)	%
Net loss attributable to UpHealth, Inc.	$	(8,083)	$	(17,445)	$	9,362	(54)	%

The following table sets forth our consolidated results of operations as a percentage of total revenue:


	Three Months Ended March 31,
	2023		2022
Revenues:
Services	73	%	71	%
Licenses and subscriptions	5	%	5	%
Products	22	%	24	%
Total revenues	100	%	100	%
Costs of revenues:
Services	33	%	44	%
License and subscriptions	1	%	1	%
Products	13	%	17	%
Total costs of revenues	46	%	61	%
Gross profit	54	%	39	%
Operating expenses:
Sales and marketing	11	%	10	%
Research and development	3	%	5	%
General and administrative	26	%	32	%
Depreciation and amortization	4	%	15	%
Stock-based compensation	2	%	4	%
Lease abandonment expenses	—	%	—	%
Goodwill and intangible asset impairment	1	%	17	%
Acquisition, integration, and transformation costs	8	%	7	%
Total operating expenses	56	%	89	%
Loss from operations	(2)	%	(50)	%
Other expense:
Interest expense	(16)	%	(19)	%
Gain on fair value of derivative liability	—	%	13	%
Gain (loss) on fair value of warrant liabilities	—	%	—	%
Other expense, net, including interest income	—	%	—	%
Total other expense	(16)	%	(6)	%
Loss before income tax benefit	(18)	%	(56)	%
Income tax benefit	—	%	6	%
Net loss	(18)	%	(49)	%
Less: net income (loss) attributable to noncontrolling interests	1	%	(1)	%
Net loss attributable to UpHealth, Inc.	(19)	%	(48)	%

Due to the deconsolidation of Glocal during the third quarter of 2022, the numbers presented above are not directly comparable between periods.

Three months ended March 31, 2023 and 2022

Revenues

In the three months ended March 31, 2023, revenues were $42.1 million, representing an increase of $6.2 million, or 17%, compared to $36.0 million in the three months ended March 31, 2022.

Services revenues increased $5.3 million, primarily due to an increase in the Services segment of $2.2 million, the Virtual Care Infrastructure segment of $1.9 million, and the Integrated Care Management segment of $1.1 million. The increase in the Services segment was primarily due to a $3.0 million increase in revenues at UpHealth BehavioralTM attributed to higher census and imporved payor mix, partially offset by a $1.0 million decrease in revenues at BHS in connection with its wind down. The increase in the Virtual Care Infrastructure segment was primarily due to a $5.2 million increase in revenues resulting from an increase in minutes from both new and existing U.S. Telehealth customers, partially offset by no revenues being recognized for Glocal during the three months ended March 31, 2023 as a result of its deconsolidation in July 2022. The increase in the Integrated Care Management segment was primarily due to an increase in professional services revenue for existing customers.

Licenses and subscriptions revenues increased $0.2 million in the Integrated Care Management segment in the three months ended March 31, 2023.

Products revenues increased $0.8 million, due to an increase in the Services segment of $0.9 million, partially offset by a decrease in the Virtual Care Infrastructure segment of $0.1 million. The increase in the Services segment was primarily due to an increase in the volume and sales prices of prescriptions in the Pharmacy business.

We expect revenues to decrease in the year ending December 31, 2023, primarily as a result of a decrease in revenues in our Services segment due to a partial year of revenues to be recognized at Innovations Group as a result of its sale, which closed on May 11, 2023, partially offset by increased revenues at the other business units. We also expect a decline in revenues in our Integrated Care Management segment in the year ending December 31, 2023. We expect these decreases will be partially offset by increased revenues in the Virtual Care Infrastructure segment as we invest in advertising and marketing, add new customers, and continue to integrate and develop our technology platforms across each of our segments. These increases will be partially offset by no revenues being recognized for Glocal in the year ending December 31, 2023 as a result of its deconsolidation in July 2022.

Cost of Revenues

In the three months ended March 31, 2023, cost of revenues was $19.5 million, a decrease of $2.5 million, or 11%, compared to $22.0 million in the three months ended March 31, 2022.

Services cost of revenues decreased $2.0 million, primarily due to decreases in the Virtual Care Infrastructure segment of $1.8 million and the Services segment of $0.5 million, partially offset by increases in the Integrated Care Management segment of $0.2 million. The decrease in the Virtual Care Infrastructure segment was primarily due to no cost of revenues being recognized for Glocal during the three months ended March 31, 2023 as a result of its deconsolidation in July 2022, partially offset by a $0.8 million increase in cost of revenues associated with higher revenues and a shift in mix from audio to video minutes in the U.S. Telehealth business. The decrease in the Services segment was primarily due to a $0.9 million decrease in costs of revenues at BHS in connection with its wind down, partially offset by a $0.4 million increase in costs of revenues at UpHealth BehavioralTM due to higher census and improved mix of services.

License and subscriptions cost of revenues increased $0.1 million in the Integrated Care Management segment in the three months ended March 31, 2023.

Products cost of revenues decreased $0.6 million due to a decrease in the Services segment of $0.5 million and the Virtual Care Infrastructure segment of $0.1 million. The decrease in the Services segment was primarily due to a $0.4 million decrease in cost of revenues at BHS in connection with its wind down.

We expect cost of revenues to decrease in the year ending December 31, 2023, commensurate with the decrease in revenues. Cost of revenues from our Services segment is expected to decrease due to a partial year of cost of revenues to be recognized at Innovations Group as a result of its sale, which closed on May 11, 2023, partially offset by increased cost of revenues at the other business units. We also expect a decline in costs of revenues in our Integrated Care Management segment, commensurate with the expected decline in revenues. We expect these decreases will be partially offset by increased cost of revenues in the Virtual Care Infrastructure segment commensurate with the expected increase in revenues in the segment, partially offset by no cost of revenues being recognized for Glocal in the year ending December 31, 2023 as a result of its deconsolidation in July 2022. Our cost of revenues may fluctuate as a percentage of our total revenue (gross margin %) from period to period due to the changes in the percentage of revenue contributed by each of our segments.

Operating Expenses

Sales and Marketing. In the three months ended March 31, 2023, S&M expenses were $4.6 million, representing an increase of $1.2 million, or 35%, compared to $3.4 million in the three months ended March 31, 2022, primarily due to an increase in compensation, benefits, and contractor expenses.

We expect S&M expenses to increase in the year ending December 31, 2023 as we invest in advertising and marketing. Our S&M expenses may fluctuate as a percentage of our total revenues from period to period due to the timing and extent we promote our brands through a variety of marketing and public relations activities.

Research and Development. In the three months ended March 31, 2023, R&D expenses were $1.3 million, representing a decrease of $0.5 million, or 27%, compared to $1.8 million in the three months ended March 31, 2022 due to an increase in capitalized software development costs.

We expect our R&D expenses to decrease in the year ending December 31, 2023, as we decrease R&D efforts in certain segments, while also increasing our capitalization of software development costs. Our R&D expenses may fluctuate as a percentage of our total revenues

from period to period due to the timing and extent of our technology and development expenses, including the ability to capitalize software development costs.

General and Administrative. In the three months ended March 31, 2023, G&A expense were $11.0 million, representing a decrease of $0.5 million, or 4%, compared to $11.5 million in the three months ended March 31, 2022, primarily due to a decrease in compensation, benefits, and contractor expenses.

We expect G&A expenses to decrease in the year ending December 31, 2023 primarily as a result of a decrease in legal and other professional fees. Our G&A expenses may fluctuate as a percentage of our total revenues from period to period due to the timing and extent of our G&A expenses.

Depreciation and Amortization. In the three months ended March 31, 2023, depreciation and amortization expenses were $1.6 million, primarily consisting of $1.1 million of amortization of intangible assets and $0.5 million of depreciation related to property and equipment, net of allocations to cost of revenues. In the three months ended March 31, 2022 depreciation and amortization expenses were $5.2 million, primarily consisting of $5.1 million of amortization of intangible assets and $0.1 million of depreciation related to property and equipment, net of allocations to cost of revenues. The decrease in depreciation and amortization expenses was due to the deconsolidation of Glocal in the third quarter of 2022, the impairment of intangible assets in the Integrated Care Management segment in the third quarter of 2022, and no depreciation and amortization expense being recorded at Innovations Group during the three months ended March 31, 2023 due to its classification as held-for-sale, partially offset by increased amortization related to an increase in capitalized software development costs and increased depreciation related to additions to property and equipment.

We expect depreciation and amortization expenses to decrease in the year ending December 31, 2023 due to decreased amortization expense related to the decrease in intangible assets, partially offset by an increase in amortization related to capitalized software development costs and an increase in depreciation from purchases of property and equipment.

Stock-Based Compensation. In the three months ended March 31, 2023, stock-based compensation expenses were $1.0 million, representing a decrease of $0.4 million, or 28%, compared to $1.4 million in the three months ended March 31, 2022, related to grants under equity incentive plans. We expect stock-based compensation expenses to increase in the year ending December 31, 2023 as we continue to make grants under our equity incentive plan to new and existing employees.

Goodwill and Intangible Asset Impairment. An impairment charge of $0.5 million was recognized in the three months ended March 31, 2023, resulting from the remeasurement of the Innovations Group disposal group to the expected proceeds, less cost to sell. An impairment charge of $6.2 million was recognized in the three months ended March 31, 2022, primarily consisting of a $5.5 million measurement period adjustment at Glocal that was immediately impaired, and a $0.7 million trade name intangible asset impairment at TTC.

Acquisition, Integration and Transformation Costs. In the three months ended March 31, 2023, acquisition, integration and transformation costs were $3.4 million, primarily related to legal and litigation expenses associated with the prior acquisitions. In the three months ended March 31, 2022, acquisition, integration and transformation costs were $2.4 million, primarily consisting of one-time transaction expenses related to the acquisitions of Thrasys, BHS, TTC, Glocal, Innovations Group, and Cloudbreak and UpHealth Holdings’ merger with UpHealth.

Other Expense

In the three months ended March 31, 2023, other expense was $6.9 million, primarily consisting of $6.9 million of interest expense. In the three months ended March 31, 2022, other expense was $2.1 million, primarily consisting of $7.0 million of interest expense, partially offset by a $4.8 million gain on fair value of derivative liability and a $0.1 million gain on fair value of warrants.

Income Tax Benefit

In the three months ended March 31, 2023, the income tax benefit was zero. In the three months ended March 31, 2022, the income tax benefit was $2.3 million.

Income tax benefit reflects management’s best assessment of estimated current and future taxes to be paid. The objectives for accounting for income taxes, as prescribed by the relevant accounting guidance, are to recognize the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for future tax consequences of events that have been recognized in our financial statements. Consistent with our conclusion as of December 31, 2022, we continue to believe that it is not more likely than not that the deferred tax assets will be realized and we therefore maintained a full valuation allowance against the deferred tax assets as of March 31, 2023. As a result, the estimated annual effective tax rate for 2023 is expected to be 0% because our forecasted losses are expected to generate no income tax benefit. Furthermore, there were no discrete tax items for the quarter ended March 31, 2023.

Segment Information

We evaluate performance based on several factors, of which revenues and gross profit by operating segment are the primary financial measures.

Revenues

Revenues by segment consisted of the following:


	Three Months Ended March 31,
In thousands	2023		2022
Integrated Care Management	$	3,873	$	2,612
Virtual Care Infrastructure	17,458		15,630
Services	20,814		17,730
Total revenues	$	42,145	$	35,972

Three Months Ended March 31, 2023 and 2022. Revenues from the Virtual Care Infrastructure segment increased $1.8 million, consisting of $1.9 million in services revenues, partially offset by a $0.1 million decrease in products revenues. The increase in services revenues was primarily due to a $5.2 million increase in revenues resulting from an increase in minutes from both new and existing U.S. Telehealth customers, partially offset by no revenues being recognized for Glocal during the three months ended March 31, 2023 as a result of its deconsolidation in July 2022.

Revenues from the Services segment increased $3.1 million, consisting of a $2.2 million increase in services revenues and a $0.9 million increase in products revenues. The increase in services revenues was primarily due to a $3.0 million increase in revenues at UpHealth BehavioralTM due to higher census and payor mix, partially offset by a $1.0 million decrease in revenues at BHS in connection with its wind down. The increase in products revenues was primarily due to an increase in the volume and sales price of prescriptions.

Revenues from the Integrated Care Management segment increased $1.3 million, primarily due to growth in professional services revenue for existing customers.

Gross profit

Gross profit by segment consisted of the following:


	Three Months Ended March 31,
In thousands	2023		2022
Integrated Care Management	$	2,580	$	1,638
Virtual Care Infrastructure	10,185		6,501
Services	9,911		5,852
Total gross profit	$	22,676	$	13,991

Three Months Ended March 31, 2023 and 2022. Gross profit from the Virtual Care Infrastructure segment increased $3.7 million, primarily due to a $4.4 million increase in services gross profit as a result in the shift in mix from audio to video minutes in the U.S. Telehealth business, partially offset by no gross profit being recognized for Glocal during the three months ended March 31, 2023 as a result of its deconsolidation in July 2022.

Gross profit from the Services segment increased $4.1 million, consisting of a $2.7 million increase in services gross profit and a $1.4 million increase in products gross profit. The increase in services gross profit was primarily due to higher census and imrpoved mix of services, at UpHealth BehavioralTM. The increase in products gross profit was primarily due to higher sales prices of prescriptions in the Pharmacy business.

Gross profit from the Integrated Care Management segment increased $0.9 million, as a result of a $0.9 million increase in services gross profit from increased professional services performed at higher margins.

Liquidity and Capital Resources

As of March 31, 2023 and December 31, 2022, we had free cash on hand of $13.3 million and $15.6 million, respectively. Excluded from cash and cash equivalents as of March 31, 2023 and December 31, 2022, was $7.0 million in funds held in a designated “Share Account”

maintained with a leading bank in India in the name of Glocal for which our Chief Financial Officer is the sole authorized signatory. As of March 31, 2023 and December 31, 2022, we had no restricted cash included in our unaudted condensed consolidated balance sheets.

We believe our current cash and expected cash collections will be sufficient to fund our operations for at least twelve months after the filing date of this Quarterly Report.

Cash Flows

The following tables summarize cash flows for the three months ended March 31, 2023 and 2022 (unaudited):


	Three Months Ended March 31,
(In thousands)	2023		2022
Net cash used in operating activities	$	(4,039)	$	(3,071)
Net cash used in investing activities	(1,341)		(1,663)
Net cash provided by (used in) provided by financing activities	3,156		(1,019)
Effect of exchange rate changes on cash and cash equivalents	—		(394)
Net decrease in cash and cash equivalents	$	(2,224)	(6,147)

As UpHealth’s subsidiaries are included from their dates of acquisition, as described above, the numbers presented above are not directly comparable between periods.

In the three months ended March 31, 2023, cash used in operating activities was $4.0 million, primarily attributed to the net loss of $7.6 million and the changes in operating assets and liabilities, net of effects of acquisitions, of $3.4 million, partially offset by $7.0 million of net non-cash items (debt issuance cost amortization, depreciation, intangible amortization, stock-based compensation and impairments, partially offset by provision for bad debt expense). The changes in operating assets and liabilities, net of effects of acquisitions, was primarily due to an increase in accounts receivable of $2.5 million resulting from increased revenues in our Virtual Care Infrastructure segment, a decrease in deferred revenue of $1.2 million, and a decrease in operating lease liabilities of $0.6 million, partially offset by an increase in accounts payable and accrued expenses of $1.6 million due to delayed payments to vendors.

In the three months ended March 31, 2022, cash used in operating activities was $3.1 million, primarily attributed to the net loss of $17.7 million and gain on fair value of derivatives, gain on fair value of warrants, partially offset by partially offset by $9.4 million of non-cash items (impairments, depreciation, intangible amortization, debt issuance cost amortization and stock-based compensation) and the changes in operating assets and liabilities, net of effects of acquisitions, of $5.2 million. The changes in operating assets and liabilities, net of effects of acquisitions, was primarily due to a decrease in accounts receivable of $3.5 million due to net collections of receivables and an increase in accounts payable and accrued expenses of $3.1 million due to delayed payments to vendors.

In the three months ended March 31, 2023, cash used in investing activities was $1.3 million, primarily consisting of purchases of property and equipment and capitalized software development costs of $1.3 million. In the three months ended March 31, 2022, cash used in investing activities was $1.7 million, primarily consisting of purchases of property and equipment.

In the three months ended March 31, 2023, cash provided by financing activities was $3.2 million, primarily consisting of proceeds from equity issuance of $4.2 million, partially offset by payments of finance lease obligations of $0.9 million. In the three months ended March 31, 2022, cash used in financing activities was $1.0 million, primarily consisting of payments of capital lease obligations of $0.8 million and repayments of debt of $0.2 million.

Debt

See Note 8, Debt, in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report for our debt.

Contractual Obligations and Commitments

See Note 15, Leases, and Note 16, Commitments and Contingencies, in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report for information about our operating lease obligations and our non-cancellable contractual service and licensing obligations.

Off-Balance Sheet Arrangements

As of March 31, 2023, we have not entered into any off-balance sheet financing arrangements, established any additional special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets.

Recent Accounting Pronouncements

See Note 2, Summary of Significant Accounting Policies, in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report for the recently issued accounting standards that could have an effect on us.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with ~~accounting principles generally accepted in the United States of America (“GAAP”)~~U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and income and expenses during the periods reported. These estimates and assumptions are based on current facts, historical experience, and various other factors that we believe are reasonable under the circumstances to determine reported amounts of assets, liabilities, ~~revenue~~revenues and expenses that are not readily apparent from other sources. To the extent there are material differences between our estimates and the actual results, our future consolidated results of comprehensive income (loss) may be affected.

Among our significant accounting policies, which are described in Note 2, Summary of Significant Accounting Policies, in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report, as well as Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements for the year ended December 31, 2022 included in our Annual Report, the following accounting policies and specific estimates involve a greater degree of judgment and complexity:

•Business combinations;

•~~Business combinations;~~Identification and reporting of variable interest entities (“VIEs”);

•Accounting for equity investments;

•Goodwill and intangible assets;

•Revenue recognition; and

•Income taxes.

There have been no changes to our critical accounting policies and estimates described in our Annual Report that have had a significant impact on our condensed consolidated financial statements and related notes.

~~UpHealth, Inc. Consolidated Results of Operations~~

~~Operating Results~~

As of June 30, 2022 and for the three and six months then ended, UpHealth’s operating results consist of the results of operations for UpHealth and its subsidiaries Thrasys, BHS, TTC, Glocal, Innovations Group, and Cloudbreak. As of June 30, 2021 and for the three and six months then ended, UpHealth’s operating results consist of (1) the results of operations for UpHealth Holdings and its subsidiaries Thrasys, BHS, TTC and Glocal and (2) the results of operations for its subsidiaries Innovations Group and Cloudbreak subsequent to their acquisitions on April 27, 2021 and June 9, 2021, respectively.

~~The following table sets forth the consolidated results of operations of UpHealth~~:

(Unaudited, in thousands) Three Months Ended June 30, Six Months Ended June 30,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
Revenue:
Services $ 28,096 $ 15,448 $ 12,648 82 % $ 53,782 $ 23,586 $ 30,196 128 %
Licenses and subscriptions 6,812 9,145 (2,333) (26) % 8,593 12,803 (4,210) (33) %
Products 8,760 7,289 1,471 20 % 17,265 8,309 8,956 108 %
Total revenue 43,668 31,882 11,786 37 % 79,640 44,698 34,942 78 %
Cost of goods and services:
Services 14,762 9,590 5,172 54 % 29,207 14,063 15,144 108 %
License and subscriptions 217 6,173 (5,956) (96) % 450 6,670 (6,220) (93) %
Products 6,296 4,727 1,569 33 % 12,286 5,643 6,643 118 %
Total cost of goods and services 21,275 20,490 785 4 % 41,943 26,376 15,567 59 %
Gross margin 22,393 11,392 11,001 97 % 37,697 18,322 19,375 106 %
Operating expenses:
Sales and marketing 3,486 1,695 1,791 106 % 6,212 2,580 3,632 141 %
Research and development 1,782 2,273 (491) (22) % 3,369 3,843 (474) (12) %
General and administrative 14,632 7,306 7,326 100 % 28,291 11,029 17,262 157 %
Depreciation and amortization 4,700 2,966 1,734 58 % 9,936 3,870 6,066 157 %
Stock-based compensation 1,088 — 1,088 — % 2,462 — 2,462 — %
Lease abandonment expenses — — — — % 75 — 75 — %
Goodwill and intangible asset impairment — — — — % 6,174 — 6,174 — %
Acquisition, integration, and transformation costs 6,749 32,653 (25,904) (79) % 9,133 35,339 (26,206) (74) %
Total operating expenses 32,437 46,893 (14,456) (31) % 65,652 56,661 8,991 16 %
Loss from operations (10,044) (35,501) 25,457 (72) % (27,955) (38,339) 10,384 (27) %
Other income (expense):
Interest expense (6,603) (4,904) (1,699) 35 % (13,598) (5,615) (7,983) 142 %
Gain on consolidation of equity method investment — — — — % — 640 (640) (100) %
Gain on fair value of derivative liability 1,841 — 1,841 — % 6,670 — 6,670 — %
Gain on fair value of warrant liabilities 95 1,075 (980) (91) % 190 1,075 (885) (82) %
Gain on extinguishment of debt — 151 (151) (100) % — 151 (151) (100) %
Other income (expense), net, including interest income 14 (256) 270 (105) % (2) (219) 217 (99) %
Total other expense (4,653) (3,934) (719) 18 % (6,740) (3,968) (2,772) 70 %
Loss before income tax benefit (14,697) (39,435) 24,738 (63) % (34,695) (42,307) 7,612 (18) %
Income tax benefit 2,232 6,646 (4,414) (66) % 4,525 7,052 (2,527) (36) %
Net loss before loss from equity method investment (12,465) (32,789) 20,324 (62) % (30,170) (35,255) 5,085 (14) %
Loss from equity method investment — — — — % — (561) 561 (100) %
Net loss (12,465) (32,789) 20,324 (62) % (30,170) (35,816) 5,646 (16) %
Less: net loss attributable to noncontrolling interests (27) (6) (21) 350 % (287) (84) (203) 242 %
Net loss attributable to UpHealth, Inc. $ (12,438) $ (32,783) $ 20,345 (62) % $ (29,883) $ (35,732) $ 5,849 (16) %

~~The following table sets forth the consolidated results of operations of UpHealth as a percentage of total revenue:~~

Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Revenue:
Services 64 % 48 % 68 % 53 %
Licenses and subscriptions 16 % 29 % 11 % 29 %
Products 20 % 23 % 22 % 19 %
Total revenue 100 % 100 % 100 % 100 %
Cost of goods and services:
Services 34 % 30 % 37 % 31 %
License and subscriptions — % 19 % 1 % 15 %
Products 15 % 15 % 15 % 13 %
Total cost of goods and services 49 % 64 % 53 % 59 %
Gross margin 51 % 36 % 47 % 41 %
Operating expenses:
Sales and marketing 8 % 5 % 8 % 6 %
Research and development 4 % 7 % 4 % 9 %
General and administrative 34 % 23 % 36 % 25 %
Depreciation and amortization 11 % 9 % 12 % 9 %
Stock-based compensation 2 % — % 3 % — %
Lease abandonment expenses — % — % — % — %
Goodwill and intangible asset impairment — % — % 8 % — %
Acquisition, integration, and transformation costs 15 % 102 % 11 % 79 %
Total operating expenses 74 % 147 % 82 % 127 %
Loss from operations (23) % (111) % (35) % (86) %
Other income (expense):
Interest expense (15) % (15) % (17) % (13) %
Gain on consolidation of equity method investment — % — % — % 1 %
Gain on fair value of derivative liability 4 % — % 8 % — %
Gain on fair value of warrant liabilities — % 3 % — % 2 %
Gain on extinguishment of debt — % — % — % — %
Other income (expense), net, including interest income — % (1) % — % — %
Total other expense (11) % (12) % (8) % (9) %
Loss before income tax benefit (34) % (124) % (44) % (95) %
Income tax benefit 5 % 21 % 6 % 16 %
Net loss before loss from equity method investment (29) % (103) % (38) % (79) %
Loss from equity method investment — % — % — % (1) %
Net loss (29) % (103) % (38) % (80) %
Less: net loss attributable to noncontrolling interests — % — % — % — %
Net loss attributable to UpHealth, Inc. (28) % (103) % (38) % (80) %

~~Due to the timing of UpHealth’s acquisitions of TTC, Glocal, Innovations Group, and Cloudbreak, the numbers presented above are not directly comparable between periods.~~

~~Three months ended June 30, 2022 and 2021~~

~~Revenue~~

In the three months ended June 30, 2022, revenue was $43.7 million, an increase of $11.8 million, or 37%, compared to $31.9 million in the three months ended June 30, 2021. Services revenue increased $12.6 million, primarily due to a $10.6 million increase in the Virtual Care Infrastructure segment resulting from a full period of operations in the three months ended June 30, 2022 at Cloudbreak, which was acquired in the second quarter of 2021. Products revenue increased $1.5 million, primarily due to an increase in the Services segment resulting from to a full period of operations in the three months ended June 30, 2022 for Innovations Group, which was also acquired in the second quarter of 2021. Licenses and subscriptions revenue declined $2.3 million, primarily due to Thrasys' loss of a contract with a European customer, net of increased revenue from an amended contract with an existing customer.

We expect revenue to increase in fiscal 2022 as compared to fiscal 2021 due to a full year of operations for TTC, Glocal, Innovations Group and Cloudbreak, which were acquired in the first half of 2021. In addition, we expect revenue to increase for the foreseeable future as we invest in advertising and marketing, as well as in the integration and development of our technology platforms across each of our segments.

~~Cost of Goods and Services~~

In the three months ended June 30, 2022, cost of goods and services was $21.3 million, an increase of $0.8 million, or 4%, compared to $20.5 million in the three months ended June 30, 2021. Cost of services increased $5.2 million, primarily due to a $4.5 million increase in the Virtual Care Infrastructure segment resulting from a full period of operations in the three months ended June 30, 2022 at Cloudbreak, which was acquired in the second quarter of 2021. Cost of products increased $1.6 million, primarily due to an increase in the Services segment resulting from a full period of operations in the three months ended June 30, 2022 for Innovations Group, which was also acquired in the second quarter of 2021. Cost of licenses and subscriptions declined $6.0 million, primarily due to Thrasys' loss of a contract with a European customer.

We expect cost of goods and services to increase in fiscal 2022 as compared to fiscal 2021 due to a full year of operations for TTC, Glocal, Innovations Group, and Cloudbreak, which were acquired in the first half of 2021. In addition, we expect cost of goods and services to increase for the foreseeable future, commensurate with the growth in our revenue. Our cost of goods and services may fluctuate as a percentage of our total revenue (gross margin %) from period to period due to the changes in the percentage of revenue contributed by each of our segments.

~~Operating Expenses~~

~~Sales and Marketing~~. In the three months ended June 30, 2022, S&M expenses, which primarily consisted of advertising, marketing programs, and events, including related wages, commissions and travel expenses, were $3.5 million, compared to $1.7 million in the three months ended June 30, 2021. The increase in S&M expenses was largely due to a $1.6 million increase in S&M expenses at Innovations Group and Cloudbreak, which were acquired in the second quarter of 2021, as well as corporate S&M expenses related to additional headcount.

We expect S&M expenses to increase in fiscal 2022 as compared to fiscal 2021 due to a full year of operations for TTC, Glocal, Innovations Group, and Cloudbreak, which were acquired in the first half of 2021. In addition, we expect our S&M expenses to increase for the foreseeable future as we invest in advertising and marketing. Our S&M expenses may fluctuate as a percentage of our total revenue from period to period due to the timing and extent we promote our brands through a variety of marketing and public relations activities.

~~Research and Development.~~ In the three months ended June 30, 2022, R&D expenses, which primarily consisted of compensation and benefits expense and other administrative costs related to the Thrasys’ software development teams, were $1.8 million compared to $2.3 million in the three months ended June 30, 2021. The decrease in R&D expenses was largely due to an increase in the capitalization of internal-use software development costs.

We expect R&D expenses to increase in fiscal 2022 as compared to fiscal 2021, and for the foreseeable future, as we continue to invest in the development and integration of our technology platforms across each of our segments. Our R&D expenses may fluctuate as a percentage of our total revenue from period to period due to the timing and extent of our technology and development expenses, including the ability to capitalize software development costs. Historically, the majority of our technology and development costs have been expensed, except those costs that have been capitalized as software development costs.

~~General and Administrative~~. In the three months ended June 30, 2022, G&A expenses, which primarily consisted of compensation and benefits expense and other administrative costs related to the executive, finance, human resources, legal, facilities, and information technology teams, net of allocations to cost of goods and services and S&M and R&D expenses, were $14.6 million, compared to $7.3 million in the three months ended June 30, 2021. The increase in G&A expenses of $7.3 million was largely due an increase of approximately $5.8 million in corporate expenses, primarily related to increased professional and legal fees and increased compensation and benefits due to increased headcount, and to a lesser extent, due to a full period of operations for Innovations Group and Cloudbreak, which were acquired in the second quarter of 2021.

We expect G&A expenses to increase in fiscal 2022 as compared to fiscal 2021 due to a full year of operations for TTC, Glocal, Innovations Group, and Cloudbreak, which were acquired in the first half of 2021, and an increase in expenses at corporate as we build out our executive, finance, human resources, legal, facilities, and information technology teams, net of savings we expect to realize as we continue to integrate and centralize G&A functions across our segments. In addition, we expect our G&A expenses to increase for the foreseeable future as we continue to grow our business. Our G&A expenses may fluctuate as a percentage of our total revenue from period to period due to the timing and extent of our G&A expenses.

~~Depreciation and Amortization~~. In the three months ended June 30, 2022, depreciation and amortization expenses were $4.7 million, primarily consisting of $4.2 million of amortization of intangible assets and $0.7 million of depreciation related to property, plant and equipment, net of allocations to cost of goods and services. In the three months ended June 30, 2021 depreciation and amortization expenses

were $3.0 million, primarily consisting of $2.7 million of amortization of intangible assets and $0.3 million of depreciation related to property, plant and equipment, net of allocations to cost of goods and services. The increase in depreciation and amortization expenses was largely due to a full period of operations for Innovations Group and Cloudbreak, which were acquired in the second quarter of 2021.

We expect depreciation and amortization expenses to increase in fiscal 2022 due to a full year of amortization of intangibles assets and depreciation of property, plant, and equipment related to TTC, Glocal, Innovations Group, and Cloudbreak, which were acquired in the first half of 2021.

~~Stock-Based Compensation~~. In the three months ended June 30, 2022, stock-based compensation expenses were $1.1 million, related to grants under equity incentive plans. There were no stock-based compensation expenses in the three months ended June 30, 2021. We expect stock-based compensation expenses to increase in fiscal 2022 as we continue to make grants under our equity incentive plan to new and existing employees.

~~Acquisition, Integration and Transformation Costs~~. In the three months ended June 30, 2022, acquisition, integration and transformation costs were $6.7 million, primarily consisting of consulting, legal, and severance costs incurred to integrate and transform the businesses. In the three months ended June 30, 2021, acquisition, integration and transformation costs were $32.7 million, primarily consisting of one-time transaction expenses related to the acquisitions of Thrasys, BHS, TTC, Glocal, Innovations Group, and Cloudbreak and UpHealth Holdings’ merger with UpHealth. While we do not expect to incur additional acquisition costs in fiscal 2022, we will incur additional integration and transformation costs in fiscal 2022, and for the foreseeable future.

~~Other Expense~~

In the three months ended June 30, 2022, other expense was $4.7 million, primarily consisting of $6.6 million of interest expense, partially offset by a $1.8 million of gain on fair value of derivative liability and a $0.1 million gain on fair value of warrant liabilities. In the three months ended June 30, 2021, other expense was $3.9 million, primarily consisting of $4.9 million of interest expense and $0.3 million of other expense, net, partially offset by a $1.1 million gain on fair value of warrants and a $0.2 million gain on extinguishment of debt.

~~Income Tax Benefit~~

~~In the three months ended June 30, 2022, the income tax benefit was $2.2 million. In the three months ended June 30, 2021, the income tax benefit was $6.6 million.~~

~~Six months ended June 30, 2022 and 2021~~

~~Revenue~~

In the six months ended June 30, 2022, revenue was $79.6 million, an increase of $34.9 million, or 78%, compared to $44.7 million in the six months ended June 30, 2022. Services revenue increased $30.2 million, primarily due to an increase of $25.4 million in the Virtual Care Infrastructure segment resulting from a full period of operations in the six months ended June 30, 2022 at Cloudbreak and Glocal, and due to an increase of $7.7 million in the Services segment resulting from a period of operations in the six months ended June 30, 2022 at Innovations Group and TTC, all of which were acquired in the first half of 2021. Products revenue increased $9.0 million, primarily due to a full period of operations in the six months ended June 30, 2022 at Innovations Group and TTC, which were acquired in the first half of 2021. Licenses and subscriptions revenue declined $4.2 million, primarily due to Thrasys' loss of a contract with a European customer, net of increased revenue from an amended contract with an existing customer.

We expect revenue to continue to increase in fiscal 2022 as compared to fiscal 2021 due to a full year of operations for TTC, Glocal, Innovations Group, and Cloudbreak, which were acquired in the first half of 2021. In addition, we expect revenue to increase for the foreseeable future as we invest in advertising and marketing, as well as in the integration and development of our technology platforms across each of our segments.

~~Cost of Goods and Services~~

In the six months ended June 30, 2022, cost of goods and services was $41.9 million, an increase of $15.6 million, or 59%, compared to $26.4 million in the six months ended June 30, 2021. Cost of services increased $15.1 million, primarily due to an increase of $12.3 million in the Virtual Care Infrastructure segment resulting from a full period of operations in the six months ended June 30, 2022 at Cloudbreak and Glocal, and due to an increase of $2.6 million in the Services segment resulting from a full period of operations in the six months ended June 30,

2022 at Innovations Group and TTC, all of which were acquired in the first half of 2021. Cost of products increased $6.6 million, primarily due to a full period of operations in the six months ended June 30, 2022 at Innovations Group and TTC, which were acquired in the first half of 2021. Cost of licenses and subscriptions revenue declined $6.2 million, primarily due to Thrasys' loss of a contract with a European customer.

~~Operating Expenses~~

~~Sales and Marketing~~. In the six months ended June 30, 2022, S&M expenses, which primarily consisted of advertising, marketing programs, and events, including related wages, commissions and travel expenses, were $6.2 million, compared to $2.6 million in the six months ended June 30, 2021. The increase in S&M expenses was largely due to a full period of operations in the six months ended June 30, 2022 for Innovations Group and Cloudbreak, which were acquired in the second quarter of 2021, as well as TTC and Glocal, which were acquired in the first quarter of 2021.

~~Research and Development.~~ In the six months ended June 30, 2022, R&D expenses, which primarily consisted of compensation and benefits expense and other administrative costs related to the Thrasys’ software development teams, were $3.4 million compared to $3.8 million in the six months ended June 30, 2021. The decrease in R&D expenses was largely due to an increase in the capitalization of internal-use software development costs.

~~General and Administrative~~. In the six months ended June 30, 2022, G&A expenses, which primarily consisted of compensation and benefits expense and other administrative costs related to the executive, finance, human resources, legal, facilities, and information technology teams, net of allocations to cost of goods and services and S&M and R&D expenses, were $28.3 million, compared to $11.0 million in the six months ended June 30, 2021. The increase in G&A expenses of $17.3 million was largely due an increase of approximately $12 million in corporate expenses, primarily related to increased professional and legal fees and increased compensation and benefits due to increased headcount, and to a lesser extent, a full period of operations in the six months ended June 30, 2022 for Innovations Group and Cloudbreak, which were acquired in Q2 2021, as well as TTC and Glocal, which were acquired in the first quarter of 2021.

~~Depreciation and Amortization~~. In the six months ended June 30, 2022, depreciation and amortization expenses were $9.9 million, primarily consisting of $9.3 million of amortization of intangible assets and $0.4 million of depreciation related to property, plant and equipment, net of allocations to cost of goods and services. In the six months ended June 30, 2021 depreciation and amortization expenses were $3.9 million, primarily consisting of $3.5 million of amortization of intangible assets and $0.4 million of depreciation related to property, plant and equipment, net of allocations to cost of goods and services. The increase in depreciation and amortization expenses was largely due to a full period of operations in the six months ended June 30, 2022 for Innovations Group and Cloudbreak, which were acquired in the second quarter of 2021, as well as TTC and Glocal, which were acquired in the first quarter of 2021.

~~Stock-Based Compensation~~. In the six months ended June 30, 2022, stock-based compensation expenses were $2.5 million, related to grants under equity incentive plans. There were no stock-based compensation expenses in the six months ended June 30, 2021. We expect stock-based compensation expenses to increase in fiscal 2022 as we continue to make grants under our equity incentive plan to new and existing employees.

~~Lease Abandonment Expenses~~. In the six months ended June 30, 2022, we recorded a lease abandonment accrual in the amount of $0.1 million related to office spaces we vacated during the period. There were no lease abandonment expenses in the six months ended June 30, 2021.

~~Goodwill and Intangible Asset Impairment~~. In the six months ended June 30, 2022, we recorded a goodwill and intangible asset impairment of $6.2 million, primarily consisting of a $5.5 million measurement period adjustment at Glocal that was immediately impaired, and a $0.7 million trade name intangible asset impairment at TTC. No impairment charge was recognized in the six months ended June 30, 2021.

~~Acquisition, Integration and Transformation Costs~~. In the six months ended June 30, 2022, acquisition, integration and transformation costs were $9.1 million, primarily consisting of consulting, legal, and severance costs incurred to integrate and transform the businesses. In the six months ended June 30, 2021, acquisition, integration and transformation costs were $35.3 million, primarily consisting of one-time transaction expenses related to the acquisitions of Thrasys, BHS, TTC, Glocal, Innovations Group, and Cloudbreak and UpHealth Holdings’ merger with UpHealth. While we do not expect to incur additional acquisition costs in fiscal 2022, we will incur additional integration and transformation costs in fiscal 2022, and for the foreseeable future.

~~Other Expense~~

In the six months ended June 30, 2022, other expense was $6.7 million, primarily consisting of $13.6 million of interest expense, partially offset by a $6.7 million of gain on fair value of derivative liability and a $0.2 million gain on fair value of warrant liabilities. In the six months ended June 30, 2021, other expense was $4.0 million, primarily consisting of $5.6 million of interest expense, partially offset by a $1.1 million gain on fair value of warrant liabilities and a $0.6 million gain on consolidation of equity method investment.

~~Income Tax Benefit~~

~~In the six months ended June 30, 2022, the income tax benefit was $4.5 million. In the six months ended June 30, 2021, the income tax benefit was $7.1 million.~~

~~Segment Information~~

~~We evaluate performance based on several factors, of which revenue and gross margin by operating segment are the primary financial measures.~~

~~Revenue~~

~~Revenue by segment consisted of the following:~~

Three Months Ended June 30, Six Months Ended June 30,
In thousands 2022 2021 2022 2021
Integrated Care Management $ 7,823 $ 11,280 $ 10,435 $ 17,569
Virtual Care Infrastructure 16,815 6,964 32,445 7,554
Services 19,030 13,638 36,760 19,575
Total revenue $ 43,668 $ 31,882 $ 79,640 $ 44,698

~~Three Months Ended June 30, 2022 and 2021.~~ Revenue from the Virtual Care Infrastructure segment increased $9.9 million, primarily due to a full period of operations in the three months ended June 30, 2022 at Cloudbreak, which was acquired in the second quarter of 2021. Revenue from the Services segment increased $5.4 million, primarily due to a full period of operations in the three months ended June 30, 2022 at Innovations Group, which was acquired in the second quarter of 2021. Revenue from the Integrated Care Management segment decreased $3.5 million, primarily due to Thrasys' loss of a contract with a European customer, net of increased revenue from an amended contract with an existing customer.

~~Six Months Ended June 30, 2022 and 2021.~~ Revenue from the Virtual Care Infrastructure segment increased $24.9 million, primarily due to a full period of operations in the six months ended June 30, 2022 at Cloudbreak and Glocal, which were acquired in the first half of 2021. Revenue from the Services segment increased $17.2 million, primarily due to a full year of operations at Innovations Group and TTC, which were acquired in the first half of 2021. Revenue from the Integrated Care Management segment decreased $7.1 million, primarily due to Thrasys' loss of a contract with a European customer, net of increased revenue from an amended contract with an existing customer.

~~Gross margin~~

~~Gross margin by segment consisted of the following:~~

Three Months Ended June 30, Six Months Ended June 30,
In thousands 2022 2021 2022 2021
Integrated Care Management $ 6,894 $ 4,504 $ 8,531 $ 9,723
Virtual Care Infrastructure 8,179 2,634 15,588 2,933
Services 7,320 4,254 13,578 5,666
Total gross margin $ 22,393 $ 11,392 $ 37,697 $ 18,322

~~Three Months Ended June 30, 2022 and 2021.~~ Gross margin from the Virtual Care Infrastructure segment increased $5.5 million, primarily due to a full period of operations in the three months ended June 30, 2022 at Cloudbreak, which was acquired in the second quarter of 2021. Gross margin from the Services segment increased $3.1 million, primarily due to a full period of operations in the three months ended June 30, 2022 at Innovations Group, which was acquired in the second quarter of 2021. Gross margin from the Integrated Care Management segment increased $2.4 million, primarily due to Thrasys' increased revenue with minimal cost from an amended contract with an existing customer, net of the loss of a contract with a European customer.

~~Six Months Ended June 30, 2022 and 2021.~~ Gross margin from the Virtual Care Infrastructure segment increased $12.7 million, primarily due to a full period of operations in the six months ended June 30, 2022 at Cloudbreak and Glocal, which was acquired in the first half of 2021. Gross margin from the Services segment increased $7.9 million, primarily due to a full period of operations in the six months ended June 30, 2022 at Innovations Group and TTC, which were acquired in the first half of 2021. Gross margin from the Integrated Care Management segment decreased $1.2 million, primarily due to Thrasys' loss of a contract with a European customer, net of increased revenue with minimal cost from an amended contract with an existing customer.

~~Liquidity and Capital Resources~~

As of June 30, 2022 and December 31, 2021, we had free cash on hand of $40.6 million and $58.2 million, respectively. As of June 30, 2022, we had restricted cash of $0.5 million, representing funds held at our Glocal business. As of December 31, 2021, we had restricted cash of $18.6 million, representing $18.1 million of funds held in an escrow account as agreed in a forward share purchase agreement (see Note 10, ~~Capital Structure, for further information) and $0.5 million of funds held at our Glocal business.~~

We believe our current cash, restricted cash, and expected cash collections will be sufficient to fund our operations for at least twelve months after the filing date of this Quarterly Report on Form 10-Q.

~~Cash Flows~~

~~The following tables summarize cash flows for the six months ended June 30, 2022 and 2021~~ ~~(unaudited)~~:

Six Months Ended June 30,
(In thousands) 2022 2021
Net cash used in operating activities $ (7,841) $ (37,228)
Net cash (used in) provided by investing activities (3,783) 3,859
Net cash (used in) provided by financing activities (23,580) 129,801
Effect of exchange rate changes on cash, cash equivalents, and restricted cash (460) (99)
Net (decrease) increase in cash, cash equivalents, and restricted cash $ (35,664) 96,333

As UpHealth Holdings effectively began operations on January 1, 2020 and operations from UpHealth’s subsidiaries are included from their dates of acquisition, as described above, the numbers presented above are not directly comparable between periods.

In the six months ended June 30, 2022, cash used in operating activities was $7.8 million, primarily attributed to the net loss of $30.2 million and gain on fair value of derivative liability, gain on fair value of warrant liabilities, partially offset by $16.1 million of non-cash items

(impairments, depreciation, intangible amortization, debt issuance cost amortization, and stock-based compensation) and the changes in operating assets and liabilities, net of effects of acquisitions, of $6.2 million. The changes in operating assets and liabilities, net of effects of acquisitions, was primarily due to a decrease in accounts receivable of $6.2 million due to net collections of receivables and an increase in accounts payable and accrued expenses of $7.9 million due to delayed payments to vendors. In the six months ended June 30, 2021, cash used in operating activities was $37.2 million, primarily attributed to the net loss of $35.8 million and the changes in operating assets and liabilities, net of effects of acquisitions, of $1.1 million, partially offset by $2.5 million of non-cash items (depreciation, deferred tax adjustments, gain on extinguishment of debt, loss on fair value of warrant liabilities, and debt issuance cost amortization). The changes in operating assets and liabilities, net of effects of acquisitions, was primarily due to an increase in accounts receivable of $21.0 million due to billed and unbilled receivables from two customers during the quarter that were not collected as of June 30, 2021, partially offset by an increase in accounts payable and accrued expenses of $15.6 million due to delayed payments to vendors, and proceeds from Provider Relief Funds of $0.5 million.

In the six months ended June 30, 2022, cash used in investing activities was $3.8 million, primarily consisting of purchases of property and equipment. In the six months ended June 30, 2021, cash provided by investing activities was $3.9 million, primarily consisting of net cash acquired in acquisition of businesses.

In the six months ended June 30, 2022, cash used in financing activities was $23.6 million, primarily consisting of the repayment of the forward share purchase of $18.5 million, payments of capital lease obligations of $1.6 million and repayments of debt obligations of $3.2 million. In the six months ended June 30, 2021, cash provided by financing activities was $129.8 million, primarily consisting of proceeds from convertible debt of $164.5 million and proceeds from merger and recapitalization transaction of $83.4 million, partially offset by repayments of seller notes of $88.1 million, repayments of debt of $17.3 million and payments of amounts due to members of $4.3 million.

~~Long-Term Debt~~

~~See Note 8,~~ ~~Debt, in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report for our long-term debt.~~

On August 12, 2022, we entered into senior secured convertible note subscription agreements with certain institutional investors, pursuant to which we agreed to issue and sell $67.5 million in aggregate principal amount of a new series of variable rate convertible senior secured notes due December 15, 2025 (the “~~2025 Notes”) to holders of our 6.25% convertible senior notes due June 15, 2026 (see Note 8,~~ ~~Debt~~) in a private placement transaction, raising approximately $22.5 million in gross cash proceeds, after paying for a repurchase of $45.0 million of the 2026 Notes, which proceeds will be used in part to fully repay the seller notes. The 2025 Notes are convertible into shares of UpHealth common stock at a conversion price, subject to the occurrence of certain corporate events, of $1.75 per share. The 2025 Notes will be senior secured obligations of UpHealth, secured by substantially all of our assets and those of our domestic subsidiaries, and will accrue interest at a rate equal to the daily secured overnight financing rate (“~~SOFR~~”) plus 9.0% per annum, with a minimum rate of 10.5% per annum, payable quarterly in arrears. The 2025 Notes will mature on December 15, 2025, unless earlier repurchased, redeemed or converted. Holders will have the right to convert their 2025 Notes at any time. Upon the occurrence of certain corporate events, holders of the 2025 Notes can require UpHealth to repurchase for cash all or part of their 2025 Notes in principal amounts of $1,000 or an integral multiple thereof at a repurchase price that will be equal to 105% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest thereon, if any. In the event that UpHealth sells assets with net proceeds in excess of $15.0 million, then it will make an offer to all holders of the 2025 Notes to repurchase the 2025 Notes for an aggregate amount of cash equal to 20.0% of the net proceeds of such asset sale, at a repurchase price per 2025 Note equal to 100.0% of the principal amount thereof, plus accrued and unpaid interest, if any. UpHealth may not otherwise seek to redeem the 2025 Notes prior to June 16, 2024. UpHealth will settle conversions solely in shares of its common stock, except for payments of cash in lieu of fractional shares.

~~Contractual Obligations and Commitments~~

~~See Note 11,~~ ~~Commitments and Contingencies~~, in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report for information about our operating lease obligations and our non-cancellable contractual service and licensing obligations.

~~Off-Balance Sheet Arrangements~~

As of June 30, 2022, we have not entered into any off-balance sheet financing arrangements, established any additional special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets.

~~Recent Accounting Pronouncements~~

~~See Note 2,~~ ~~Summary of Significant Accounting Policies, in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report for the recently issued accounting standards that could have an effect on us.~~

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required.

Item 4. Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer (“~~CEO”) and Chief Financial Officer (“CFO”), to allow timely decisions regarding required disclosure.~~

Evaluation of Our Disclosure Controls and Procedures

We maintain a system of disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information is accumulated and communicated to management, including our ~~CEO~~Chief Executive Officer (“CEO”) and ~~CFO,~~Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. Our management, under the supervision and with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on that evaluation, our CEO and CFO concluded that our ~~disclosure~~entity-level controls and ~~procedures~~business process controls were ~~not~~ effective as of ~~June 30, 2022, because of the material weaknesses in~~March 31, 2023; however, our ~~internal control over financial reporting described below.~~

~~Our management~~CEO and CFO also concluded that ~~our disclosure controls and procedures and internal controls over financial reporting were not effective as of June 30, 2022 due to~~ the ~~following~~previously identified material ~~weaknesses:~~

•Lack of appropriately designed entity-level controls impacting the control environment and monitoring activities to prevent or detect material misstatements to the condensed consolidated financial statements;

•~~Lack of appropriately designed~~weakness in our information technology general controls (“ITGCs”) in the areas of user access, ~~and~~ segregation of duties, ~~including controls over the recording of journal entries~~ and ~~safeguarding of assets,~~change management related to certain information technology systems that support our financial reporting ~~process;~~process were not remediated as of March 31, 2023, and

•~~Lack~~ that the material weakness remains for these ITGCs. Further remediation of ~~appropriately designed and implemented controls over~~ the ~~following:~~

~~◦ Recording~~non-remediated portions of ~~revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers at certain subsidiaries. Specifically, we had errors~~the material weakness in our ~~revenue recognition pertaining~~ITGCs is ongoing and our objective is to ~~the determination of whether a contract exists, the identification of performance obligations, and the timing and amount of revenue to be recognized;~~complete such remediation efforts by June 2023.

~~◦ Completeness of accruals~~There were no misstatements identified in the ~~purchase to disbursement process and the payroll process at certain subsidiaries;~~

~~◦ Segregation of duties and monitoring controls over the treasury cycle at certain subsidiaries;~~

~~◦ Financial statement close process at certain subsidiaries to ensure the consistent execution, accuracy, and timely review of account reconciliations; and~~

~~◦ Financial statement preparation process that involves the use of a spreadsheet and manually consolidating all subsidiaries.~~

~~No misstatements have been identified in the~~unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2023 as a result of ~~these~~this material ~~weaknesses.~~weakness.

Changes in Internal Control Over Financial Reporting

~~As of June 30, 2022, we are engaged~~Other than the remediation efforts related to our ITGCs described above, there was no change in ~~the process of the design, documentation, and implementation of~~ our internal control over financial reporting that occurred in ~~a manner commensurate with~~ the ~~scale of~~three months ended March 31, 2023 that has materially affected, or is reasonably likely to materially affect, our ~~operations post-Business Combinations. As of June 30, 2022, all of the US entities are live on a new Enterprise Resource Planning (“ERP~~”) system and we have implemented additional controls as a result. We have also commenced implementation of the ERP system at our subsidiary in India. Additionally, we are hiring additional accounting staff to assist with the preparation of account reconciliations, the implementation and performance of monitoring controls, and the remediation of segregation of duties issues.internal control over financial reporting.

~~Remediation~~Inherent Limitations on Effectiveness of ~~the Material Weaknesses~~Controls

~~During~~The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the ~~year ended December 31, 2021, we began remediation efforts~~exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to ~~address~~eliminate misconduct completely. Accordingly, in designing and evaluating the ~~material weaknesses identified,~~disclosure controls and procedures, management recognizes that any system of internal control over financial reporting, including ~~enhancing~~ours, no matter how well designed and operated, can only provide reasonable, not absolute assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal ~~and external technical accounting resources and engaging third party consultants~~controls as necessary or appropriate for ~~the formalization of~~ our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal procedures, the implementation of Section 404 of the Sarbanes-Oxley Act, and the implementation of a new ERP system. As of June 30, 2022, all of the US entities are live on the ERP system and we have commenced implementation of the ERP system at our subsidiary in India. The material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. Our objective is to complete remediation efforts by the end of 2022.control over financial reporting.

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Part II - Other Information

Item 1. Legal Proceedings

From time to time, we may be subjected to claims or lawsuits which arise in the ordinary course of business. Estimates for resolution of legal and other contingencies are accrued when losses are probable and reasonably ~~estimable in accordance with ASC 450,~~ ~~Contingencies~~.estimable. In the opinion of management, after consulting with legal counsel, none of these other claims are currently expected to have a material adverse effect on our condensed consolidated results of operations, financial position or cash flows. Except as set forth below, our material legal proceedings are described in Note 16, Commitments and Contingencies, in the Notes to Condensed Consolidated Financial Statements in ~~Note 11,~~ ~~Commitments and Contingencies~~.Part I of this Quarterly Report.

~~Jeffery R. Bray~~Dispute and ~~Chirinjeev Kathuria v. Avi Katz, et al., and UpHealth, Inc., C.A. No. 2022-0489-LWW~~Litigation Regarding Control of Glocal Board of Directors

~~As further described~~Please refer to Part I, Item 3 of our Annual Report for information regarding the dispute and litigation regarding control of the Glocal board of directors. This process remains in the ~~Current Report on Form 8-K that~~early stages, and the ~~Company filed with the U.S. Securities and Exchange Commission (the “SEC”) on June 10, 2022, on June 6, 2022, the then Co-Chairman~~International Court of Arbitration of the ~~Board, Dr. Chirinjeev Kathuria, and~~International Chamber of Commerce is scheduling hearing dates for the ~~Company’s Chief Legislative Affairs Officer, Jeffery R. Bray, filed a complaint~~arbitration that are expected to occur in the ~~Court~~second half of ~~Chancery of the State of Delaware (the “Court~~”) against the Company as nominal defendant, and as defendants, the following members of the Company’s Board – the Company’s then‑other Co Chairman of the Board, and now, sole Chairman of the Board, Dr. Avi Katz, and directors Dr. Raluca Dinu, Neil Miotto, Agnès Rey Giraud, Nate Locke and Moshe Bar-Siman-Tov (who has since resigned from the Board as disclosed in the Current Report on Form 8-K that the Company filed on July 12, 2022), entitled ~~Jeffery R. Bray and Chirinjeev Kathuria v. Avi Katz, et al., and UpHealth, Inc., C.A. No. 2022-0489-LWW (the “Complaint~~”). The Complaint sought declaratory and injunctive relief to require the Company to schedule and hold a special meeting of the Company’s stockholders on August 4, 2022 and to enjoin the 2022 Annual Meeting of Stockholders then scheduled to occur on June 28, 2022, until after the special meeting of stockholders is held. As discussed in more detail in the Current Report on Form 8-K filed with the SEC on June 10, 2022, the Complaint alleged that the defendant directors breached their fiduciary duties.

On June 24, 2022, the Court declined to enter preliminary injunctive relief to require the Company to schedule and hold a special meeting, but did rule to delay the 2022 Annual Meeting of Stockholders then scheduled to occur on June 28, 2022 to a later date to allow the Court to conduct a trial. The purpose of the trial was to address issues that would enable the Company to determine the quorum threshold to be used by the Company for the 2022 Annual Meeting of Stockholders when the 2022 Annual Meeting of Stockholders occurs.

Notwithstanding the foregoing, and as described in the Current Report on Form 8-K filed with the SEC on August 2, 2022, the trial will not occur as on August 2, 2022, the Court, at the request of the plaintiffs, dismissed the Complaint with prejudice.2023.

Item 1A. Risk Factors

As of the date of this Quarterly Report on Form 10-Q, we supplement the risk factors disclosed in our Annual Report with the following risk factors. Any of these risk factors disclosed in our Annual Report or herein could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. We may disclose changes to such risk factors or disclose additional risk factors from time to time in our future filings with the SEC.

~~It remains unclear how the ongoing coronavirus (COVID-19) pandemic may impact our business, financial condition, results of operations~~Risks Relating to UpHealth’s Business and ~~growth.~~

In March 2020, the World Health Organization declared COVID-19 a global pandemic. This contagious outbreak, which has continued to spread, and the related adverse public health developments, including orders to shelter-in-place, travel restrictions and mandated business closures, have adversely affected workforces, organizations, customers, economies and financial markets globally, initially leading to an economic downturn, followed by supply chain disruptions and inflationary pressures and increased market volatility. The continued duration and severity of this pandemic remains unknown, and the extent of the business disruption and financial impact depend on factors beyond our knowledge and control, making it difficult for us to accurately predict the duration or magnitude of the adverse results of the outbreak and its effects on our business, results of operations or financial condition at this time, but such effects may be material.

Continued shelter-in-place, quarantine, hospital requisitions, or related measures to combat the spread of COVID-19 or any variants thereof, as well as the perceived need by individuals to continue such practices to avoid infection, among other factors, could harm our results of operations and revenue, business and financial condition. These measures and practices have resulted in temporary and

permanent closures of some of our offices, and the offices and practices of our customers, and may also result in delays in entry into new markets and expansion in existing markets. In addition, customers who utilize our services or products in connection with in-office healthcare procedures, as well as our businesses that provide in-office healthcare procedures, may experience a loss in revenue associated with such measures and practices, potentially negatively impacting their ability or willingness to pay us. In addition, due to the shelter-in-place orders across the globe, several of our businesses have implemented work-from-home policies for many employees which may impact productivity and disrupt our business operations. Generally, we have seen our businesses rebound from an initial negative impact at the start of the pandemic. However, given the unpredictable nature of the COVID-19 pandemic, we may in the future experience additional negative impacts on our operations, revenues, expenses, collectability of accounts receivables and other money owed, capital expenditures, liquidity and overall financial condition by disrupting or delaying delivery of materials and products in the supply chain for our offices, causing staffing shortages, or increasing capital expenditures due to the need to buy incremental hardware.

Healthcare organizations around the world have faced and will continue to face, substantial challenges in treating patients with COVID-19, such as the diversion of hospital staff and resources from ordinary functions to the treatment of patients with COVID-19, supply, resource and capital shortages and overburdening of staff and resource capacity. In the United States, governmental authorities have also recommended, and in certain cases required, that elective, specialty and other procedures and appointments, including certain primary care services, be suspended or canceled to avoid non-essential patient exposure to medical environments and potential infection with COVID-19 and to focus limited resources and personnel capacity toward the treatment of patients with COVID-19. These measures may divert patients away from our businesses that provide products and services direct to consumers and from procedures in healthcare facilities that utilize our products and services, which could harm our results of operations and revenue.

Our continued access to sources of liquidity also depend on multiple factors, including global economic conditions, the condition of global financial markets, the availability of sufficient amounts of financing and our operating performance. There is no guarantee that debt or equity financing will be available in the future to fund our obligations, or that it will be available on commercially reasonable terms, in which case we may need to seek other sources of funding.

~~Unstable market and economic conditions may have series adverse consequences on our business, financial condition and stock price.~~

As widely reported, global credit and financial markets have experienced extreme volatility and disruptions over the past several months, including declines in consumer confidence, concerns about declines in economic growth, increases in the rate of inflation, increases in borrowing rates and changes in liquidity and credit availability, and uncertainty about economic stability, including most recently in connection with the military conflict in Ukraine, the continuing effects of the COVID-19 pandemic and supply chain disruptions. There can be no assurance that further deterioration in credit and financial markets and confidence in economic conditions will not occur. Our general business strategy may be adversely affected by any such economic downturn, volatile business environment or continued unpredictable and unstable market conditions. Our business could also be impacted by volatility caused by geopolitical events, such as the conflict in Ukraine. A significant downturn in the economic activity attributable to any particular industry may cause organizations to react by reducing their capital and operating expenditures in general or by specifically reducing their spending on healthcare matters. In addition, our customers may delay or cancel healthcare projects or seek to lower their costs by renegotiating vendor contracts. Such delays or reductions in general healthcare spending may disproportionately affect our revenue. In addition, if the current equity and credit markets deteriorate, or do not improve, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. Furthermore, our stock price may decline due in part to the volatility of the stock market and the general economic downturn.

Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or scale back on our growth plans. We cannot predict the timing, strength, or duration of any economic slowdown or any subsequent recovery generally, of any industry in particular. If the conditions in the general economy and the markets in which we operate worsen from present levels, our business, financial condition, and results of operations could be materially adversely affected.

Our business, results of operations and financial condition may fluctuate on a quarterly and annual basis, which may result in a decline in our stock price if such fluctuations result in a failure to meet any projections that we may provide or the expectations of securities analysts or investors.

The operating results of our six subsidiary company businesses have in the past varied, and our operating results in the future could vary, significantly from quarter-to-quarter and year-to-year. We may fail to match past performance, our projections or the expectations of securities analysts because of a variety of factors, many of which are outside of our control. As a result, we may not be able to accurately forecast our operating results and growth rate. Any of these events could cause the market price of our Common Stock to fluctuate. Factors that may contribute to the variability of our operating results include:

•~~the addition or loss of large customers, including through acquisitions or consolidations of such customers;~~

•~~seasonal and other variations in the timing of our sales and implementation cycles, especially in the case of our large customers;~~

•travel restrictions, shelter in place orders and other social distancing measures implemented to combat the COVID-19 pandemic, and their respective impact on economic, industry and market conditions, customer spending budgets and our ability to conduct business;

•~~the timing of recognition of revenue, including possible delays in the recognition of revenue due to unpredictable implementation timelines;~~

•the timing and success of introductions of new products and services by us or our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors, hospital and healthcare system customers or strategic partners;

•~~the amount of operating expenses and timing related to the maintenance and expansion of our business, operations and infrastructure;~~

•~~our ability to effectively manage the size and composition of our proprietary network of healthcare professionals relative to the level of demand for services from our customers;~~

•~~customer renewal rates and the timing and terms of such renewals;~~

•~~technical difficulties or interruptions in our services;~~

•~~breaches of information security or privacy;~~

•~~our ability to hire and retain qualified personnel;~~

•~~changes in the structure of healthcare provider and payment systems;~~

•changes in the legislative or regulatory environment, including with respect to healthcare, privacy or data protection, or enforcement by government regulators, including fines, orders or consent decrees;

•~~the cost and potential outcomes of ongoing or future regulatory investigations or examinations, or of future litigation;~~

•political, economic and social instability, including recessions, inflation, interest rates, fuel prices, international currency fluctuations, acts of war (such as the recent Russian invasion of Ukraine), terrorist activities and health epidemics (including the COVID-19 pandemic), and any disruption these events may cause to the global economy; and

•~~changes in business or macroeconomic conditions.~~

The impact of one or more of the foregoing and other factors may cause our operating results to vary significantly. As such, we believe that quarter-to-quarter and year-to-year comparisons of our operating results may not be meaningful and should not be relied upon as an indication of future performance.Industry

In order to support the growth of our business, we may need to seek capital through new equity or debt financings, and such sources of additional capital may not be available to us on acceptable terms or at all.

~~The prior operations of our subsidiary companies consumed substantial amounts of cash since their respective inceptions.~~ We intend to continue to make significant investments to support our business growth, respond to business challenges or opportunities, develop new applications and services, enhance our existing solutions and services, enhance our operating infrastructure and potentially acquire complementary businesses and technologies. For the ~~six~~years three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021,~~ for all acquired or to be acquired subsidiaries, aggregate net cash used in operating activities was ~~$7.8~~$4.0 million and ~~$37.2~~$3.1 million, respectively.

Our future capital requirements may be significantly different from our current estimates and will depend on many factors, including our growth rate, both organically and through acquisitions, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new or enhanced services and the continuing market acceptance of digital health. Accordingly, we may need to engage in additional equity or debt financings or collaborative arrangements to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our ~~Common Stock.~~common stock. Any debt financing secured by us in the future could involve additional restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, during times of economic instability, ~~including as a result of the COVID-19 pandemic,~~ it has been difficult for many companies to obtain financing in the public markets or to obtain debt financing, and we may not be able to obtain additional financing on commercially reasonable terms, if at all. If we are unable to obtain adequate financing on terms satisfactory to us, it could have a material adverse effect on our business, financial condition and results of operations.

Our debt agreements contain restrictions that may limit our flexibility in operating and financing our business, and any default on our secured credit facility could result in foreclosure by our secured noteholders on our assets.

Our Indenture governing our 2025 Notes, Security Agreement and related documents contain, and instruments governing any future indebtedness of ours would likely contain, a number of covenants that will impose significant operating and financial restrictions on us, including restrictions on our ability to, among other things:

•create liens on certain assets;

•incur additional debt or issue new equity;

•consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and

We recently acquired a total of six subsidiaries in conjunction with or through the Business Combinations, and we may acquire other companies or technologies, which could divert our management’s attention, result in dilution to our stockholders and otherwise disrupt our operations, and we may have difficulty successfully integrating any such acquisitions or realizing the anticipated benefits of them, any of which could have an adverse effect on our business, financial condition and results of operations.•sell certain assets.

~~Our subsidiary companies have~~Any of these restrictions could limit our ability to plan for or react to market conditions and could otherwise restrict corporate activities. Any failure to comply with these covenants could result in a default under our secured credit facility or instruments governing any future indebtedness of ours. Additionally, our credit facility for the ~~past sought,~~2025 Notes is secured by substantially all of our assets and ~~we in~~those of our domestic subsidiaries. Upon a default, unless waived, the ~~future may seek,~~lenders under our secured credit facility could elect to ~~acquire~~terminate their commitments, cease making further loans, foreclose on our assets pledged to such lenders to secure our obligations under our Security Agreement and force us into bankruptcy or invest in businesses, applications and services or technologies that we believe could complement or expand our solutions, enhance our technical capabilities or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated.

liquidation. In addition, ~~both with respect~~a default under our secured credit facility could trigger a cross default under agreements governing any future indebtedness as well as the Indenture governing our 2026 Notes. Our results of operations may not be sufficient to ~~the recent or pending acquisitions of~~service our ~~subsidiaries~~indebtedness and ~~additional businesses we may choose~~ to ~~acquire,~~fund our other expenditures, and we may not be able to successfully integrate the acquired personnel, operations and technologies successfully, or effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including, but not limited to:

•~~management’s lack of experience in acquiring and integrating business;~~

•~~inability to integrate or benefit from acquired technologies or services in a profitable manner;~~

•~~unanticipated costs or liabilities, including legal liabilities, associated with the acquisition;~~

•~~entry into new markets and locations in which we have little operating experience or experience with government rules, regulations and restrictions;~~

•~~difficulty integrating the accounting systems, operations and personnel of the acquired business;~~

•~~difficulties and additional expenses associated with supporting legacy products and hosting infrastructure of the acquired business;~~

•difficulty converting the customers of the acquired business onto our platform and contract terms, including disparities in the revenue, licensing, support or professional services model of the acquired company;

•~~diversion of management’s attention from other business concerns;~~

•~~adverse effects to our existing business relationships with business partners and customers as a result of the acquisition;~~

•~~the potential loss of key employees or contractors;~~

•~~use of resources that are needed in other parts of our business; and~~

•~~use of substantial portions of our available cash to consummate the acquisition.~~

In addition, a significant portion of the purchase price of businesses we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our results of operations based on this impairment assessment process, which could adversely affect our results of operations. We performed a goodwill impairment assessment as of December 31, 2021, which included both qualitative and quantitative assessments. Our assessment included a comparison of carrying value to an estimated fair value using a market approach based on our market capitalization. Based on this assessment, we concluded the fair value of all three segments was below the carrying value primarily due to the recent change in our market valuation and financial performance and recorded a goodwill impairment in the amount of $297.9 million. In the three months ended June 30, 2022, we recorded no measurement period adjustments and no impairment of goodwill or intangible assets. In the six months ended June 30, 2022, as a result of measurement period adjustments, we increased goodwill in the amount of $5.5 million, which was immediately impaired. In addition, in the six months ended June 30, 2022, we impaired intangible assets in the amount of $0.7 million.

~~Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our results of operations. In addition, if an acquired business fails~~obtain financing to meet these requirements. If we experience a default under our ~~expectations,~~secured credit facility, our unsecured credit facility or instruments governing our future indebtedness, our business, financial condition, and results of operations may ~~suffer.~~be adversely impacted.

In addition, the 2025 Notes mature on December 15, 2025. There are no assurances that that we will have sufficient funds available to satisfy the 2025 Notes at maturity, or that the holders will elect to convert the 2025 Notes into shares of our common stock prior to or at the time of maturity.

As of March 31, 2023, we were in compliance with all covenants and restrictions associated with our debt agreements.

We qualify as an emerging growth company as defined under the JOBS Act as well as a smaller reporting company within the meaning of the Securities Act, and if we take advantage of certain exemptions from disclosure requirements available to emerging growth companies or smaller reporting companies, this could make our securities less attractive to investors and may make it more difficult to compare our performance with other public companies.

We qualify as an “emerging growth company” within the meaning of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies for as long as we continue to be an emerging growth company, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. As a result, our stockholders may not have access to certain information they may deem important. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the end of that year’s second fiscal quarter, (ii) the last day of the fiscal year in which we have total annual gross revenues of $1.235 billion or more during such fiscal year (as indexed for inflation), (iii) the date on which we have issued more than $1.0 billion in non-convertible debt in the prior three-year period or (iv) the last day of the fiscal year following the fifth anniversary of our IPO. We cannot predict whether investors will find our securities less attractive because we will rely on these exemptions. If some investors find our securities less attractive as a result of our reliance on these exemptions, the trading prices of our securities may be lower than they otherwise would be, there may be a less active trading market for our securities and the trading prices of our securities may be more volatile.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the exemption from complying with new or revised accounting standards provided in Section 7(a)(2)(B) of the Securities Act as long as we are an emerging growth company. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have not elected to opt out of such extended transition period and, therefore, we may not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. This may make comparison of our financial statements with another public company which is not an emerging growth company or is an emerging growth company that has opted out of using the extended transition period difficult or impossible because of the potential differences in accountant standards used.

Additionally, we qualify as a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (i) the market value of our common stock held by non-affiliates exceeds $250.0 million as of the end of that year’s second fiscal quarter, or (ii) our annual revenues exceeded $100.0 million during such completed fiscal year and the market value of our common stock held by non-affiliates exceeds $700.0 million as of the end of that year’s second fiscal quarter. To the extent we take advantage of such reduced disclosure obligations, it may also make comparison of our financial statements with other public companies difficult or impossible.

If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired, and the price of our common stock may be adversely affected.

As a publicly traded company following the consummation of the Business Combinations, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the applicable listing standards of the New York Stock Exchange (“NYSE”). We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly and place significant strain on our personnel, systems and resources. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers.

As previously disclosed in our Annual Report on Form 10‑K for year ended December 31, 2021, our disclosure controls and procedures and internal controls over financial reporting were not effective as of December 31, 2021 due to certain material weaknesses described in Part I, Item 4, Controls and Procedures, of this Quarterly Report, as well as in Part II, Item 9A, Controls and Procedures, of our Annual Report. To address these material weaknesses that we identified as of December 31, 2021, we implemented measures designed to improve our internal controls over financial reporting during the year ended December 31, 2022. These measures included enhancing our internal and external technical accounting resources and engaging third party consultants for the formalization of our internal procedures, and implementing a new enterprise resource planning (“ERP”) system. As of December 31, 2022, all of the U.S. entities are live on the ERP system. We completed documentation and tests of design and tests of operational effectiveness of our entity-level controls, certain areas of our ITGCs, and controls over our business processes, and we remediated control gaps identified and performed tests of operating effectiveness on remediated items.

As a result of our remediation efforts, our management, under the supervision and with the participation of our CEO and our CFO and oversight of the Board of Directors, conducted an evaluation of the effectiveness of our internal controls over financial reporting as of December 31, 2022, based on the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this evaluation, our management concluded that as of December 31, 2022, we no longer have the material weaknesses in internal controls over financial reporting described above for entity-level controls and business process controls, which we previously identified existed as of December 31, 2021 and our assessment has not changed as of March 31, 2023; however, our management also concluded that the previously identified material weakness in our ITGCs in the areas of user access, segregation of duties, and change management related to certain information technology systems that support our financial reporting process were not remediated as of March 31, 2023, and that the material weakness remains for these ITGCs. Further remediation of the non-remediated portions of the material weakness in our ITGCs is ongoing and our objective is to complete such remediation efforts by June 2023.

In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight. If any of these new or improved controls and systems do not perform as expected, we may experience additional material weaknesses in our controls. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, additional weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future.

Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NYSE.

General Risks Related to the Company

The Company may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on its financial condition, results of operations and stock price, which could cause you to lose some or all of your investment.

Although the Company conducted due diligence on UpHealth Holdings and Cloudbreak in connection with the Business Combinations, the Company cannot assure you that this diligence revealed all material issues that may be present in UpHealth Holdings’ or Cloudbreak’s business, as applicable, that it would be possible to uncover all material issues through a customary amount of due diligence, or that factors outside of the Company’s, UpHealth Holdings’ and Cloudbreak’s control will not later arise. As a result of events which occurred during the three months ended September 30, 2022, as discussed under the heading “Dispute and Litigation Regarding Control of Glocal Board of Directors” in Item 3, Legal Proceedings, of Part I of our Annual Report, we determined that a reconsideration event occurred in July 2022, which required us to reassess whether Glocal was a VIE and whether we continued to have a controlling financial interest in Glocal. Based on this assessment, we concluded that Glocal was a VIE, and furthermore, that we no longer have the ability to direct any activities of Glocal and no longer have a controlling financial interest. As a result, effective July 2022, we deconsolidated Glocal and recorded a $37.7 million loss on deconsolidation of equity investment in our consolidated statements of operations, measured as the difference between the probability-weighted fair value of Glocal of $21.2 million and the carrying amount of Glocal’s assets and liabilities as of June 30, 2022. The probability-weighted fair value of Glocal is included in equity investment in our consolidated balance sheets. Further, we assessed the prospective accounting for our equity investment in Glocal. Since we no longer had the ability to exercise significant influence over operating and financial policies of Glocal, we concluded the investment should be accounted for utilizing the ASC 621 measurement alternative, whereby the investment was measured at cost and will continue to be evaluated for any indicators of impairment. In addition, we derecognized $14.3 million of noncontrolling interests related to Glocal. If through the legal processes discussed under the heading “Dispute and Litigation Regarding Control of Glocal Board of Directors” in Item 3, Legal Proceedings, of Part I of our Annual Report, we are able to obtain the ability to direct the activities of Glocal, and it is our intent to exercise all legal rights and remedies to achieve such a result, then we will further reassess the appropriate accounting treatment of our investment in Glocal.

The Company may be forced to write-down or write-off assets in the future, restructure its operations, or incur impairment or other charges that could result in losses. ~~Even if the Company’s due diligence successfully identified certain risks, unexpected risks~~

~~may arise and previously known risks may materialize in a manner not consistent with the Company’s preliminary risk analysis.~~ Even though these charges may be non-cash items and may not have an immediate impact on the Company’s liquidity, the fact that the Company reports charges of this nature could contribute to negative market perceptions about it or its securities. ~~During~~Furthermore, as a result of indicators of impairment identified during the ~~fourth quarter~~three months ended September 30, 2022, we performed a goodwill impairment assessment as of ~~2021,~~September 30, 2022, which included both qualitative and quantitative assessments. Our assessment included a comparison of carrying value to an estimated fair value using a market approach based on our market capitalization. Based on this assessment, we concluded the fair value of two segments was below the carrying value primarily due to the recent change in our market valuation and financial performance and recorded a goodwill impairment in the amount of ~~$297.9~~$89.1 million and ~~in the three months ended March 31, 2022, we recorded a goodwill impairment related to measurement period adjustments in the amount of $5.5 million, as well as~~ an intangible asset impairment in the amount of $16.9 million. We also recorded a $0.5 million and a $1.8 million charge on the remeasurement of the disposal group held for sale in the three months ended March 31, 2023 and December 31, 2022, respectively, in connection with the pending sale of Innovations Group. Additionally, we recorded a $5.5 million measurement period adjustment at Glocal that was immediately impaired, and a $0.7 ~~million.~~million trade name intangible asset impairment at TTC during the three months ended March 31, 2022. In addition, charges of this nature may cause the Company to be unable to obtain future financing on favorable terms or at all.

~~There can be no assurance that UpHealth will be able to comply with the continued listing standards of the NYSE.~~

UpHealth’s Common Stock and warrants are listed on the NYSE under the symbols “UPH.BC” and “UPH.WS.BC” respectively. If the NYSE delists UpHealth’s shares from trading on its exchange for failure to meet the listing standards, UpHealth and its stockholders could face significant material adverse consequences including:

•~~a limited availability of market quotations for UpHealth’s securities;~~

•a determination that UpHealth Common Stock is a “penny stock” which will require brokers trading in UpHealth Common Stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for shares of UpHealth Common Stock;

•~~a limited amount of analyst coverage; and~~

•~~a decreased ability to issue additional securities or obtain additional financing in the future.~~

Resales of our shares of ~~Common Stock~~common stock could depress the market price of our ~~Common Stock.~~common stock.

We have approximately ~~147,215,675~~16,784,476 shares of ~~Common Stock~~common stock outstanding ~~at August 14, 2022.~~as of May 10, 2023. The shares held by the Company’s public stockholders are freely tradable. In addition, the Company registered shares of ~~Common Stock~~common stock issued as merger consideration (none of which remain subject to a contractual lockup period), registered for resale shares of common stock issued in the 2023 Private Placement, and will be registering shares for resales by its officers, directors and other affiliates, as well as shares underlying the warrants and ~~convertible notes~~Convertible Notes issued by the Company, which shares will become available for resale following the exercise or conversion of the warrants or ~~convertible notes,~~Convertible Notes, respectively. Rule 144 also became available for the resale of shares of our ~~Common Stock~~common stock on June 14, ~~2021.~~2022. Such sales of shares of ~~Common Stock~~common stock or the perception of such sales may depress the market price of our ~~Common Stock.~~common stock.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

~~None.~~Please refer to the Current Reports on Form 8-K that we have filed with the SEC for information regarding our private placement that closed on March 13, 2023.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

~~None.~~

5045

The vesting schedule for 430,000 RSUs previously granted to Samuel J. Meckey, our Chief Executive Officer, on January 9, 2023 will be changed as follows: subject to Mr. Meckey’s continued service to the Company, 25% of the RSUs shall vest on June 22, 2023 (the “Initial Vesting Date”), and the remaining 75% of the RSUs shall vest in equal quarterly installments on each subsequent August 22, November 22, and March 7 over the three years following the Initial Vesting Date, such that the RSUs will be 100% vested on June 22, 2027.

Item 6. Exhibits


Exhibit No.						Description


3.1**						Second Amended and Restated ~~Bylaws~~Certificate of Incorporation of UpHealth, Inc., as amended by the Certificate of Amendment effective December 8, 2022 (incorporated by reference to ~~the Amended and Restated Bylaws of~~Exhibit 3.1 to UpHealth, Inc. ~~effective May~~’s Annual Report on Form 10-K filed with the SEC on March 31, ~~2022.~~

10.1#*						~~Employment Agreement, dated May 10, 2022, by and between UpHealth, Inc. and Samuel J. Meckey.~~2023).

~~10.2~~3.2**						~~Form~~Second Amended and Restated Bylaws of ~~Subscription Agreement~~UpHealth, Inc., effective August 22, 2022 (incorporated by reference to Exhibit ~~10.1~~3.1 to the Company’s Current Report on Form 8-K filed with the SEC on August ~~15,~~24, 2022).

~~10.3~~4.1**						Form of ~~Indenture~~Series A Warrant (incorporated by reference to Exhibit ~~10.2~~4.1 to ~~the Company’s~~UpHealth, Inc.’s Current Report on Form 8-K filed with the SEC on ~~August 15, 2022)~~March 9, 2023).

~~10.4†~~4.2**						Form of ~~Security Agreement (incorporated~~Series B Warrant (incorporated by reference to Exhibit ~~10.3~~4.2 to ~~the Company’s~~UpHealth, Inc.’s Current Report on Form 8-K filed with the SEC on ~~August 15, 2022~~)March 9, 2023).

~~10.5~~4.3**						Form of ~~Note Purchase Agreement~~Pre-Funded Warrant (incorporated by reference to Exhibit ~~10.4~~4.3 to ~~the Company’s~~UpHealth, Inc.’s Current Report on Form 8-K filed with the SEC on ~~August 15, 2022)~~March 9, 2023).

10.1#**						Inducement Equity Incentive Plan (incorporated by reference to Exhibit 4.4 to UpHealth, Inc.’s Registration Statement on Form S-8 filed with the SEC on May 8 , 2023).

10.2#*						Form of Restricted Stock Units Agreement.

10.3#*						Form of Notice of Grant of Restricted Stock Units.

10.4#**						Amendment to Employment Agreement, dated January 12, 2023, by and between UpHealth, Inc. and Samuel J. Meckey (incorporated by reference to Exhibit 10.1 to UpHealth, Inc.’s Current Report on Form 8-K filed with the SEC on January 13, 2023).

10.5†**						Stock Purchase Agreement, dated February 26, 2023, by and among UpHealth, Inc., UpHealth Holdings, Inc., Innovations Group, Inc. and Belmar MidCo, Inc. (incorporated by reference to Exhibit 2.1 to UpHealth, Inc.’s Current Report on Form 8-K filed with the SEC on February 27, 2023).

10.6**						Release Agreement, dated February 26, 2023, by and among UpHealth, Inc., UpHealth Holdings, Inc. and Innovations Group, Inc. (incorporated by reference to Exhibit 10.1 to UpHealth, Inc.’s Current Report on Form 8-K filed with the SEC on February 27, 2023).

10.7**						Form of Securities Purchase Agreement, dated as of March 9, 2023, by and between UpHealth, Inc. and the Purchaser (incorporated by reference to Exhibit 10.1 to UpHealth, Inc.’s Current Report on Form 8-K filed with the SEC on March 13, 2023).

10.8**						Form of Registration Rights Agreement, dated as of March 9, 2023, by and between UpHealth, Inc. and the Purchaser (incorporated by reference to Exhibit 10.2 to UpHealth, Inc.’s Current Report on Form 8-K filed with the SEC on March 9, 2023).

31.1*						Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*						Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~2002.

32.1*						Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*						Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS						Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.

101.SCH						Inline XBRL Taxonomy Extension Schema Document.

101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104						Cover Page Interactive Data File (embedded within the Inline XBRL document).


*			Filed herewith.

†			Certain exhibits and schedules to this exhibit have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant agrees to furnish a copy of the omitted exhibits and schedules to the SEC on a supplemental basis upon its request.

#			Indicates a management contract or compensatory plan or arrangement.

5148

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on ~~August 15, 2022.~~May 11, 2023.



UPHEALTH, INC.

By:						/s/ Samuel J. Meckey
Name:						Samuel J. Meckey
Title:						Chief Executive Officer (Principal Executive Officer)

By:						/s/ Martin S. A. Beck
Name:						Martin S. A. Beck
Title:						Chief Financial Officer (Principal Financial and Accounting Officer)

5249


(In thousands)	As of June 30, 2022		Measurement Period Adjustments		As of January 25, 2021
Accounts receivable	$	1,311	$	(462)	$	1,773
Prepaid expenses and other	187		—		187
Identifiable intangible assets	1,125		—		1,125
Property and equipment	531		—		531
Other assets	281		—		281
Goodwill	58,354		780		57,574
Total assets acquired	61,789		318		61,471
Accounts payable	625		—		625
Accrued expenses and other current liabilities	602		—		602
Due to related parties	4,200		2,807		1,393
Debt	11,216		(1,284)		12,500
Deferred tax liabilities	446		(28)		474
Total liabilities assumed	17,089		1,495		15,594
Net assets acquired	$	44,700	$	(1,177)	$	45,877


	Approximate Fair Value		Estimated Useful Life
(In thousands)			(in years)
Definite-life intangible assets – Trade names	$	1,125	3
Total fair value of identifiable intangible assets	$	1,125


(In thousands)	As of June 30, 2022		Measurement Period Adjustments		As of March 26, 2021
Accounts receivable, net	$	1,350	$	(5,111)	$	6,461
Inventories	325		—		325
Identifiable intangible assets	45,289		7,250		38,039
Property, equipment, and work in progress	26,767		(13,959)		40,726
Other current assets, including short term advances	15		(1,965)		1,980
Other noncurrent assets, including long term advances	509		—		509
Goodwill	121,913		30,042		91,871
Total assets acquired	196,168		16,257		179,911
Accounts payable	579		—		579
Accrued expenses and other current liabilities	9,692		1,421		8,271
Income tax liability	2,420		2,420		—
Deferred tax liability	8,649		8,649		—
Debt	19,937		(2,275)		22,212
Noncontrolling interest	29,278		11,889		17,389
Total liabilities assumed and noncontrolling interest	70,555		22,104		48,451
Net assets acquired	$	125,613	$	(5,847)	$	131,460


	Three Months Ended June 30,		Six Months Ended June 30,
(In thousands)	2021		2021
Pro Forma
Revenues	$	39,171	$	69,778
Net income (loss)	$	(37,052)	$	(43,627)
Basic earnings per share	$	(0.39)	$	(0.52)
Diluted earnings per share	$	(0.39)	$	(0.52)


Outstanding at December 31, 2021	10,693	5.63
RSUs granted	598	2.13
RSUs exercised and released	(338)	2.13
RSUs forfeited	(207)	1.93
Outstanding at March 31, 2022	10,746	5.61
RSUs granted	135	1.00
RSUs vested and issued	(5,563)	8.80
RSUs forfeited	(1,645)	1.93
Outstanding at June 30, 2022	3,672	2.27


(In thousands)	Related Party		Third- Party		Sublease Income		Minimum Lease Payments, Net of Sublease Income
Remaining 2022	$	405	$	1,469	$	(235)	$	1,639
2023	809		2,478		(403)		2,884
2024	809		2,126		(408)		2,527
2025	809		1,464		(420)		1,853
2026	34		1,006		(433)		607
Thereafter	—		430		(72)		358
	$	2,866	$	8,973	$	(1,971)	$	9,868